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THE  CAUSE  OF 
BUSINESS  DEPRESSIONS 


THE  CAUSE  OF 
BUSINESS  DEPRESSIONS 


AS    DISCLOSED    BY  AN    ANALYSIS    OF 
THE  BASIC  PRINCIPLES  OF  ECONOMICS 


BY 
HUGO  BILGRAM 

IN  COLLABORATION  WITH 

LOUIS  EDWARD  LEVY 


WITH  TWENTY-SIX  DIAGRAMS 


riTILADELPIIIA  &  LONDON 

J.  B.  LirPINCOTT  COMPANY 

1914 


COPYRIGHT,   1914,  BY  J.  B.  LIPPINCOTT   COMPANY 


PUBLISHED     AI'BIl.,      I914 


PRINTBD    BY«  *.    B.    T^ITI'I'IJ'OCT.T  COMPANY 

AT  THE  WASHINGTON  SQUARE  PRESS 

PHILADELPHIA,    U.  S.  A. 


1i  -i"-' 

PREFACES 


It  is  a  matter  of  experience  that  financial  crises  and  periods 
of  industrial  depression  continue  to  recur  at  successive  in- 
tervals.    As  these  events  bring  distress  to  many  of  the  in- 
dustrial workers,  the  question  naturally  obtrudes  itself,  is  it 
■within  the  range  of  possibility  to  correct  this  evil  ?    Whether  or 
::,  not  this  can  be  done  depends  on  the  nature  of  the  cause  under- 
lying these  business  disturbances.    If  these  are  the  natural  out- 
groAvth  of  industrial  progress  and  commercial  development, 
there  can  be  no  hope  of  avoiding  them.    If,  on  the  other  hand, 
they  are  due  to  some  extraneous  cause,  then  there  is  a  possi- 
bility of  preventing  their  recurrence  and  of  insuring  continued 
business  prosperity.    But  even  then,  an  effective  remedy  can- 
?  not  be  pointed  out  unless  that  cause  is  first  clearly  understood. 
"         It  was  through  a  desire  to  obtain  an  insight  into  this  prob- 
o  lem  that  I  became  interested  in  the  study  of  political  economy, 
but  a  careful  reading  of  various  works  on  the  subject  left  me 
still  in  the  dark.    The  several  explanations  of  those  economic 
adversities  advanced  in  economic  literature  appeared  to  me 
,  altogether  unsatisfactory. 

V  Convinced  that  there  must  be  some  definite  cause  for  the 
.^  recurrent  periods  of  business  depression,  I  continued  my  in- 
^  vestigation  on  basis  of  those  economic  propositions  which  are 
manifestly  true,  and,  proceeding  by  methods  of  purely  logical 
deduction,  I  was  led  to  conclusions  which  in  many  particulars 
conflict  with  the  currently  accepted  economic  teachings,  but 
which  furnish  a  full  and  complete  explanation  of  those  dis- 
turbances and  show  them  to  bo  the  symptoms  of  a  curable 
economic  disorder. 

My  occupation  leaving  me  but  scant  leisure  in  which  to  put 
these  conclusions  in  shape  for  publication,  my  earlier  writings 
on  the  subject  were  but  fragmentary  and  incomplete.  Latterly, 
however,  through  the  sympathetic  co-operation  of  another  stu- 


c> 


8G.3S0 


vi  PREFACES 

dent  interested  in  the  same  line  of  investigation,  these  con- 
elusions  have  been  wrought  into  the  form  of  the  present  work, 
which  is  presented  as  a  contribution  to  the  discussion  on  this 
most  important  question. 

Acknowledgment  of  my  obligation  is  due  not  only  to  my 
collaborator,  but  also  to  the  late  Herman  V.  Hetzel  for  assist- 
ance in  my  earlier  studies,  and  to  my  son,  Oscar  H.  Bilgram, 
for  valuable  counsel  in  the  preparation  of  this  work. 

Hugo  Bilgram. 

II 

The  plan  of  the  present  work  had  been  outlined  and  its 
foundation  laid  by  my  collaborator  when  my  interest  in  its 
subject-matter  led  to  my  joining  him  in  bringing  it  to  its 
present  form.  That  interest  had  long  before  been  aroused 
by  the  turmoil  of  contention  between  labor  and  capital  over 
their  respective  shares  of  their  joint  products,  and  between 
political  parties  over  systems  of  money,  and  by  my  contem- 
plation of  the  significant  fact  that  these  conditions  had 
developed  as  an  accompaniment  of  the  vastly  increased  pro- 
ductiveness of  industry  which  is  so  marked  a  feature  of  our 
modern  time. 

That  the  existing  economic  tension,  which  finds  expression 
in  combinations  of  capital  to  restrain  competition  in  the  mar- 
ket of  goods  and  in  combinations  of  wage-earners  to  restrain 
competition  in  the  market  of  labor,  and  in  the  efforts  of  both 
classes,  each  in  its  own  interest,  to  restrict  production,  is 
caused  by  some  distortion  in  the  economic  system  is  evident 
enough,  and  that  there  is  imperative  need  of  some  effective 
means  of  relieving  the  strain  is  likewise  manifest. 

To  learn  what  remedy  there  might  be  for  these  unnatural 
conditions  I  had  turned,  like  my  collaborator,  to  the  literature 
of  economics,  and  out  of  the  confusing  maze  of  contradictory 
teachings  on  the  subject  I  had  found  my  way  to  the  con- 
clusion that  the  rancorous  discords  which  make  of  our  modem 
industrial  and  commercial  life  an  arena  of  embittering  strife 
are  engendered  by  defects  of  our  monetary  system  which  give 


PREFACES  vii 

to  capital  an  undue  advantage  over  labor.  Furthermore,  that 
no  tax  reform,  no  social  or  political  reform  can  remove  the 
cause  of  the  prevailing  economic  discord,  and  that  nothing 
but  a  simple  readjustment  of  our  monetary  system  is  needed 
to  that  end. 

The  reasons  for  our  conclusions  could  not  be  made  plain 
without  such  thoroughgoing  analysis  of  the  basic  principles 
of  political  economy  as  my  collaborator  had  planned,  and  our 
joint  task  has  been  to  present  these  principles  without  more 
technical  detail  than  might  be  necessary  for  their  demonstra- 
tion and  to  point  out  their  application  in  such  manner  as  would 
make  the  subject  plain,  not  only  to  the  specializing  student,  but 
to  every  other  intelligent  reader  as  well. 

Louis  Edward  Levy. 


CONTENTS 


PART  I 
CHAPTER  FUNDAMENTAL  CONCEPTS 

I.  Introduction 3 

II.  Production  and  Consumption 10 

III.  The  Social  Compact 17 

IV.  Value 26 

V.  Credit 77 

VI.  Monet 90 


PART  II 

DISTRIBUTION  OF  WEALTH 

VII.  The  Process  of  Apportionment 159 

VIII.  Labor  and  Wages 210 

IX.  Land  and  Rent 221 

X.  Capital  Goods  and  Capital  Returns 240 

XI.  Money  and  Money  Interest 27G 

XII.  Chance  Profits  and  Losses 289 

PART  III 
RESTRAINTS  ON  INDUSTRY 

XIII.  Monopoly 301 

XIV.  Monopoly  Theory  of  Interest 311 

XV.  Business  Stagnation 362 

PART  IV 

CONCLUSIONS 

XVI.  Currency  Reform 383 

XVII.  Effects  of  Currency  Refor:.: 426 

XVIII.  Old  Problems  in  a  New  Light 456 

Appendix.    Comments  on  the  United  States  Banking  and  Cur- 
rency Law,  Approved  December  23,  1913 515 

List  of  Authors  Quoted 519 

Index 523 

Plates  of  Diagrams 53;J 


SYNOPSIS 

PART  I 
FUNDAMENTAL  CONCEPTS 

PAGE 

Chapter  I. — Introduction 3 

1.  Theory  as  Applied  to  Economics.  2.  Theory  and  Practice.  3. 
Induction  and  Deduction. 

4.  Plan  of  Present  Investigation. 

Chapter  II. — Production  and  Consumption 10 

5.  Motives  of  Human  Activity.     6.  The  Process  of  Developing 

Utilities. 

7.  Production.  8.  Labor  Defined.  9.  Labor  Embodied  in  Products. 
10.  Means  of  Production.  11.  Specialization  of  Labor.  12. 
Distribution  a  Factor  in  Labor  Specialization.  13.  Waste 
Attending  Production. 

14.  Consumption. 

Chapter  III. — The  Social  Compact 17 

15.  The  Elements  of  Association.    16.  Composite  Persons. 

17.  Rights,  the  Bonds  of  Association.  18.  Legal  Rights.  19.  Right 
and  Duty.  20.  Definition  of  Equity.  21.  The  Right  of 
Ownership. 

22.  The  State  and  its  Fimction. 

Chapter  IV. — Value 26 

23.  Significance  of  the  Term.    24.  Distinction  between  Value  and 

Utility.     25.  Definition  of  Value.     36.  Market  Value.     27. 
How  Values  Are  Measured. 

28.  The  Unit  of  Value.  29.  Price.  30.  Labor  as  a  Measure  of 
Value.  31.  Other  Value  Units.  32.  Expediency  of  a  Com- 
posite Unit. 

33.  The  Theory  of  Value.    34.  Supply  and  Demand  Defined. 

35.  Subjective  Valuation.  36.  Desire  the  Impelling  Force.  37. 
Limitation  of  Demand.  38.  Bohm-Bawerk's  Illustration. 
39.  Graphical  Representation  of  Utility.  40.  The  Question 
of  Quantity.  41.  Reluctance  the  Restraining  Force.  42. 
Graphical  Representation  of  Effort.  43.  The  Point  of  Equi- 
hbrium.  44.  Choice  as  Regards  Production.  45.  Choice 
as  Regards  Consumption.  46.  Advantages  of  the  Graphical 
Method  of  Study. 

47.  Barter.  48.  The  Buyer's  Price  Limit.  49.  The  Seller's  Price 
Limit.  50.  Exchange  Rate  in  Barter.  51.  Buying  and 
Selling. 


SYNOPSIS  xi 

52.  The  Market.  53.  The  Common  Value  Denominator.  54. 
Appraisement  of  the  Value  Unit.  55.  Interdependence  of 
Prices.  56.  Price  Limits  Compounded.  57.  Relation  of 
Supply  and  Demand  to  Price.  58.  The  Law  of  Value.  59. 
Current  Price.  60.  Normal  Price.  6L  Cost,  the  Sellers' 
Price  Limit. 

62.  Cost  and  Utility  Theories  of  Value.  63.  Both  Theories  Corol- 
laries of  the  Same  Proposition. 

64.  Illustrations. 

65.  Capitalized  Values. 

Chapter  V. — Credit 77 

66.  The  Nature  of  Credit.    67.  The  Right  of  Ownership  Analyzed. 

68.  Credit  Defined.    69.  Three  Forms  of  Credit.    70.  Diver-- 
gent    Conceptions    of    Credit.      7L  "Possession"    Versus 
"Ownership." 

72.  The  Substance  of  Credit.  73.  Superposed  Credits.  74.  Pubhc 
Credit. 

75.  The  Value  of  Credit.    76.  Depreciated  Credit. 
Chapter  VI. — Money 90 

77.  Misconceptions  Regarding  Money.  78.  Money  not  a  Value 
Denominator.  79.  "Dollar"  does  not  Mean  "Money."  80. 
Money  not  a  Store  of  Value.  81.  Money  not  a  Stand- 
ard of  Deferred  Payment.  82.  Importance  of  Sharp 
Definitions. 

83.  The  Function  of  Money. 

84.  The  Distinctive  Feature  of  Money.    85.  Money  a  Product  of 

Social  Compact.  86.  Monetary  Laws.  87.  The  Right  Con- 
veyed by  Money.  88.  The  Term  "Money"  in  its  Broadest 
Sense. 

89.  The  Theory  of  Money.  90.  Money  Analogous  to  Book  Ac- 
counts. 91.  Creditors  and  Debtors  of  the  Money  System. 
92.  The  Issuer  of  Currency  is  Debtor. 

93.  Standard  Money.  94.  Holder  of  Standard  Money  both 
Creditor  and  Debtor. 

95.  Legal-tender  Notes.  96.  Depreciated  Currency.  97.  Fiat 
Money.  98.  History  of  Legal-tender  Laws.  99.  Legal- 
tender  Quality  not  Essential  to  Money. 

100.  Subsidiary  Coin. 

101.  Bank-note  Currency.     102.  The  Real   Issuers  of  Bank  Cur- 

rency.   103.  Evolution  of  Modern  Banking. 

104.  Bank  Credit.    105.  The  Real  Issuers  of  Bank  Credit. 

106.  Subordinate  Systems. 

107.  The  Value  of  Money.     108.  The  Value  of  Gold.     109.  The 

Price  of  Gold.     110.  Bimetallism.     HI.  Composite  Value 
Units.    112.  Depreciated  Value  Unit. 


xii  SYNOPSIS 

113.  The  Seignorage  Theory.  114.  The  Seignorage  Theory  Un- 
tenable. 

115.  The  Volume  Theory  of  the  Value  of  Money.  116.  Ricardo's 
Statement  of  the  Volume  Theory.  117.  Mill's  Argument. 
118.  Mill's  Reasoning  Analyzed.  119.  Newcomb's  Argu- 
ment. 120.  Newcomb's  Reasoning  Analyzed.  121.  Valid 
Deductions  from  Newcomb's  Equation.  122.  The  Volume 
Theory  in  the  Light  of  History.  123.  The  Volume  Theory 
Inconsistent  with  Facts.  124.  Seeming  Confirmations  of 
the  Volume  Theory.  125.  Minor  Incongruities  of  the 
Volume  Theory. 

PART  II 

DISTRIBUTION  OF  ^VEALTH 

Chapter  VII. — The  Process  of  Apportionment 159 

126.  Statement  of  the  Problem.    127.  Modem  Industrial  Methods. 

128.  The  Factors  of  Production.  129.  What  is  Capital?  130. 
Land  a  Form  of  Capital.  131.  The  Three  Forms  of  Capital. 
132.  Classification  of  Capital  Goods.  133.  Active  and  Idle 
Capital.    134.  Money  is  always  Idle  Capital. 

135.  The  Conception  of  Capital  as  a  "Fund." 

136.  Classification  of  Incomes.     137.  Wages  and   Profits.     138. 

Classification  of  Profits.  139.  Gross  Profits  of  Capital. 
140.  Gross  Business  Profits. 

141.  Composition  of  Productive  Groups.  142.  Active  Agents. 
143.  Passive  Agents.  144.  The  Venturer.  145.  Com- 
posite Agents.      146.  The  Employer. 

147.  Competition,  the  Controlling  Force.  148.  Direct  Effects  of 
Competition.  149.  Indirect  Effects  of  Competition.  150. 
The  Law  of  Value  Presupposes  Free  Competition. 

151.  Apportionment  of  Proceeds  of  Production.  152.  The  Func- 
tion of  Capital  Goods  in  the  Apportionment.  153.  The 
Value  of  Capital  Goods.  154.  Apportionment  within 
Groups.     155.  Economic  Relations  of  Labor  and  Capital. 

156.  Influence  of  Capital  on  the  Productivity  of  Labor. 

157.  Graphical  Analysis.  158.  Effect  of  a  Varying  Interest 
Rate.  159.  Effect  of  Interest  Rate  on  Wages.  160.  Effect 
of  a  Varying  Wage  Rate.  161.  Graphical  Analysis  by  Dif- 
ferentiated Function.    162.  Final  Efficiency  of  Capital. 

Chapter  VIII. — Labor  and  Wages 210 

163.  The   "Wage  Fund"   Theory.      164.  The  Wage  Theory  of 

Sociahsm. 
165.  Three  Forms  of  Wages.     166.  Wages  Apportioned  through 

Competition.     167.  Employers'  Wages.     168.  Merchants 

Wages. 
169.  Adjustment  of  Wages. 


SYNOPSIS  xiii 

Chapter  IX. — Land  and  Rent 221 

170.  Land  the  Prime  Source  of  Wealth.  171.  Land  Distinguished 
from  Improvements  Thereon. 

172.  Ricardo's  Law  of  Rent.  173.  Graphical  Representation  of 
Ricardo's  Law.    174.  Misinterpretations  of  Ricardo's  Law. 

175.  The  Margin  of  Cultivation.    176.  Cumulative  Rent. 

177.  Intensity  of  Cultivation.  178.  The  Point  of  Diminishing 
Returns. 

179.  The  Personal  Factor  in  Rent. 

180.  The  Source  of  Rent. 

181.  Land  Values.     182.  The  Law  of  Land  Value.     183.  Specula- 

tive Land  Value.  184.  Division  of  the  Gross  Profits  De- 
rived from  Land. 

185.  Summary. 

Chapter  X. — Capital  Goods  and  Capital  Returns 240 

186.  Capital  Interest.     187.  Distinction  of  Capital  Interest  and 

Rent.  188.  Distinction  of  Capital  Interest  and  Money 
Interest.    189.  Current  Theories  of  Interest. 

190.  Calvin's  and  Turgot's  Explanation  of  Interest. 

191.  The  Productivity  Theory  of  Interest.     192.  Analysis  of  the 

Productivity  Theory.  193.  Interest  Ascribed  to  Nature's 
Reproductive  Powers.  194.  Interest  Theory  of  Henry 
George. 

105.  Inception  of  the  "Abstinence"  Theory  of  Interest.  196. 
Senior's  Abstinence  Theory. 

197.  Bohm-Bawerk's  Theory  of  Interest.  198.  Utility  Theory  of 
the  Value  of  Capital  Goods.  199.  Time  Involved  in  Pro- 
duction with  Capital.  200.  The  Value  of  Lending.  201. 
Relation  of  Money  to  Merchandise.  202.  Money  never 
"Present"  Goods.  203.  Money  never  a  Means  of  Pro- 
duction. 204.  Calvin's  Reasoning.  205.  Interest  as  an 
Inducement  to  Production  of  Capital.    206.  Summary. 

207.  The  "Surplus  Value"  Theory.  208.  The  Theory  Incon- 
.sistent  with  Facts. 

Chapter  XI. — Money  and  Money  Interest 276 

209.  Interest  on  Money  Loans.  210.  Money  Interest  is  Paid  for 
the  Use  of  Money.  211.  The  Industrial  Function  of  Money. 

212.  Eflficiency  of  Money.  213.  Tinal  EfTiciency  of  Money.  214. 
Significance  of  the  Phrase  "Efficiency  of  Money." 

Chapter  XII. — Chance  Profits  and  Losses 289 

215.  Chance  as  an  Economic  Factor. 

216.  Profits  and  Losses  from  Changes  in  Value.     217.   Profits  to 

he  Di.stinguiKhed  from  Wages.     21S.  Gambling. 

219.  The  Element  of  Risk.     220.  Insurance. 


f    /        2^ 
\  /  23 


xiv  SYNOPSIS 

221.  Economic  Inertia.     222.  Factors  of  Economic  Inertia.    223. 
Economic  Momentum. 

224.  The  Law  of  Chance  Profits. 


PART  III 

RESTRAINTS  ON  INDUSTRY 

Chapter  XIII. — Monopoly 301 

225.  Economic  Impediments.  226.  Monopoly  Implies  Restraint. 
227.  Ethics  of  MonopoHes. 

228.  Ownership  a  Form  of  Monopoly.  229.  Patent  and  Copy 
Rights.  230.  Land  Ownership.  231.  Franchises  Depend- 
ing on  the  Use  of  Land.  232.  Impersonal  Monopolies. 
233.  "Cornering"  the  Market. 

234.  Monopoly  Incomes.    235.  The  Power  of  Monopoly. 

Chapter  XIV. — The  Monopoly  Theory  of  Interest 311 

^236.  Usury  Laws.     237.  Distinction  between  Usury  and  Interest. 

238.  Money  Subject  to  an  Impersonal  Monopoly.  239.  The 
Supposed  Danger  of  "Inflation." 

240.  Interest  on  Money  Due  to  Competition  for  Money. 

241.  Cause  of  the  Inadequacy  of  Capital.  242.  Key  to  the  Theory 
of  Capital  Interest.  243.  The  Missing  Link  in  the  Pro- 
ductivity Theory. 

244.  The  Law  of  Interest.  245.  The  Barren  Circulation  of  Money. 
246.  The  Growth  of  Loan  Debts.  247.  Differentiating  the 
Financial  from  the  Industrial  World.  248.  The  Several 
Barren  Currents.  249.  Preparatory  Currents.  250.  The 
Volume  of  Active  Funds.  251.  The  Volume  of  Loan  Debts. 
252.  The  Rate  of  Interest.  253.  A  Seeming  Contradiction. 
254.  Effect  of  the  Interest  Power  of  Money.  255.  Inevita- 
ble Consequence.  256.  Effect  of  Business  Failures  on  Pure 
Interest. 


257.  Rate  of  Capital  Interest.  258.  Capital  Interest  an  Intra- 
marginal  Profit. 

259.  Currency  Laws  Examined.  260.  Existing  Cm-rency  Laws 
Inequitable.  261.  Pure  Interest  a  Monopoly  Tax.  262. 
The  Power  of  the  Money  Monopoly. 

263.  Service  Rendered  by  the  Lender  of  Money.  264.  The  Third 
Item  of  Gross  Interest.  265.  Service  Rendered  by  the 
Capitalist.    266.  Abundance  of  Real  Capital. 

267.  Summary. 

Chapter  XV. — Business  Stagnation 362 

268.  Involuntary  Idleness.    269.  Excess  of  Supply  over  Demand 

270.  Insufficient  Supply  of  Money  the  Cause, 


SYNOPSIS  XV 

;  271.  The  Cycle  of  Industrial  Activity.     272.  First  Period.     273. 
/  Second  Period.     274.  Third  Period.     275.  Fourth  Period. 

276.  Succession  of  Cause  and  Effect. 

277.  Current  Explanations  of  Business  Stagnation.  278.  Over- 
trading. 279.  Improvident  Investments.  280.  Undue 
Expansion  of  Credit.  281.  Loss  of  Confidence.  282. 
Hoarding  of  Money.  283.  Extravagance.  284.  EfTect  of 
Tariff  on  General  Business  Conditions. 

PART  IV 

CONCLUSIONS 

Chapter  XVI. — Currency  Reform 383 

285.  Essentials  of  a  Sound  Currency. 

286.  The  Security  of  Money.    287.  The  Issuer's  Pledge.    288.  The 

Agent's  Pledge.  289.  Insurance  of  Currency.  290.  Insur- 
ance of  Bank  Credit.  291.  The  Natural  Limit  of  the 
Volume  of  Currency. 

292.  Currency  Redemption.  293.  The  Demand  for  Gold.  294. 
Can  the  Monetary  Demand  for  Gold  be  Reduced?  295. 
Centralized  Redemption.  296.  Deferred  Redemption. 
297.  Procuring  Gold  for  Redemption. 

298.  The  Communal  Agreement.  299.  The  Process  of  Issuing 
Currency. 

300.  Money  Tokens.    301.  The  Cost  of  Issuing  Currency. 

302.  Plan  of  Currency  Reform.  303.  Organization  of  Banks  of 
Issue.  304.  Deposit  Insurance.  305.  Missing  or  Lost 
Notes.  306.  The  Legal-tender  Quality.  307.  The  Func- 
tion of  Banks  of  Issue.    308.  Summary. 

309.  A  Credit  Clearing  System.  310.  Ways  and  Means  of  the 
Sj^stem.  311.  Payment  of  Individual  Balances.  312.  De- 
ferred Payments.  313.  Issue  of  Notes.  314.  Advantages 
of  the  System. 

Chapter  XVII. — Effects  of  Currency  Reform 425 

315.  Direct  Results.    316.  Indirect  Results. 

317.  Unfounded  Apprehensions.  318.  Natural  Inducements  to 
Save.  319.  Inducements  to  Invest  Savings.  320.  Opposi- 
tion to  Currency  Reform.  321.  The  Increasing  Cost  of 
Living.    322.  A  Real  Source  of  Danger. 

—  323.  The  Land  Question.  324.  The  Right  of  Land  Ownership. 
325.  Land  Laws  Examined.  326.  Land  Ownership  a  Vested 
Right.  327.  Bearing  of  Currency  Reform  on  the  Land 
Question.  328.  A  Concrete  Illustration.  329.  Land  Values 
Tantamount  to  a  Public  Debt.  330.  As.seRsment  of  Land 
Values.  331.  Exemption  of  Fixed  Improvenient.s  from 
Taxation.  332.  The  Tax  Rate.  333.  Land  Tax  Ample  for 
Pulilic  Needs. 

334.  Exclusive  Rights  or  Franchises, 


xvi  SYNOPSIS 

vChapter  XVIII. — Old  Problems  in  a  New  Light 456 

/       /835.  Diagnosis  of  the  Economic  Disorder. 

336.  Capital  not  Productive.  337.  The  "Almighty"  Dollar.  338. 
The  Concentration  of  Wealth.  339.  Efforts  to  Curb  the 
Concentration  of  Wealth.  340.  Corporation  and  Bank- 
ruptcy Laws. 

341.  Public  Debts. 

342.  The  Strife  of  Competition.  343.  Competition  in  a  Moneyless 
Community.  344.  The  Advent  of  Money.  345.  The  Real 
Battle-ground.    346.  Significance  of  the  Illustration. 

-^347.  The  Iron  Law  of  Wages.  348.  The  Employer's  Part  in  the 
Process  of  Apportionment.  349.  The  Downward  Tendency 
of  Wages.  350.  Effect  of  Proposed  Currency  Reform  on 
Wages. 

351.  Protective  Tariff.  352.  Balance  of  Trade  Co-related  to  Rate 
of  Interest.    353.  Advantages  of  a  Tariff. 

354.  Trade  Unions.  355.  Labor  Legislation.  356.  Arbitration  of 
Labor  Disputes.  357.  Strikes  and  Boycotts.  358.  What 
Trade  Unions  Accomplish. 

59.  The  Single  Tax.  360,  Ethical  Status  of  Land  Ownership. 
361.  Henry  George's  Theory  of  Business  Fluctuation.  362. 
Analysis  of  this  Theory.  363.  Discrepancy  between  that 
Theory  and  Facts.    364.  Single  Tax  not  a  Remedy. 

365.  Socialism.  366.  Theory  of  Socialism.  367.  Impracticability 
of  SociaUsm.    368.  Communism. 

369.  Anarchism.  370.  Land  Tenure  under  Anarchism.  371. 
Theory  of  Anarchism  Regarding  Price. 

372.  Conclusion. 

APPENDIX 

Comments  on   the   United   States  Banking    and  Currency 
Law,  Approved  December  23,  1913 515 


REFERENCES  AND  CROSS  REFERENCES 

The  index  at  the  end  of  this  volume  is  supplemented  by  references  and 
cross  references  inserted  in  the  text.  The  numbers  enclosed  in  parentheses 
refer  to  the  serial  numbers  of  the  paragraphs. 

For  illustration,  in  paragraph  1  will  be  found  the  reference  (43,  329).  Both 
these  numbers  have  their  counterparts  in  the  paragraphs  43  and  329, 
indicated  by  the  number  (1).  The  statements  so  marked  are  co-related. 
Where  there  are  several  cross  references  in  the  same  two  paragraphs,  they 
are  distinguished  by  letters.  Thus  in  paragraph  56  there  are  two  refer- 
ences to  paragraph  39  which  are  marked  in  paragraph  39  by  (56a)  and 
(566),  and  in  paragraph  56  by  (39a)  and  (396). 

When  a  reference  relates  to  a  subject  treated  in  several  consecutive 
paragraphs,  the  counter  reference  in  the  text  referred  to  is  omitted. 
See,  for  instance,  the  mark  (36-38)  in  paragraph  48,  which  has  no 
coimterpart  in  either  of  the  paragraphs  36,  37  or  38. 


PART  I 

FUNDAMENTAL  CONCEPTS 


THE  CAUSE  OF 
BUSINESS  DEPRESSIONS 

CHAPTER  I 
INTRODUCTION 

I.  Theory  as  Applied  to  Economics. — Almost  from  the 
beginning  of  the  modem  system  of  production  industrial  prog- 
ress has  been  attended  by  economic  disturbances  which  have 
gradually  widened  their  compass  from  comparatively  localized 
extent  to  national  and  even  international  proportions.  While 
the  need  of  preventing  such  disturbances  is  universally  recog- 
nized, none  of  the  remedies  thus  far  applied  has  proved 
efficacious. 

Before  such  remedy  can  be  prescribed,  it  is  necessary  that 
the  cause  of  the  evil  be  clearly  understood.  Why  is  it  that  in 
these  modern  days,  when  signal  advances  in  science  and  the 
arts  have  led  to  improvements  in  the  means  and  methods  of 
production  in  everj^  direction,  there  are  times  when  multitudes 
of  workers  find  themselves  brought  to  want  and  privation  for 
lack  of  the  very  things,  the  production  of  which  has  been  so 
greatly  facilitated?  Why  is  it  that  "good  times,"  when  em- 
ployment can  be  had  by  all  who  seek  it,  are  periodically  suc- 
ceeded by  "hard  times,"  when  thousands  are  thrown  out  of 
emplojrment  in  practically  every  branch  of  industry  and  com- 
merce? Why,  in  short,  are  the  processes  of  production  and 
exchange  subject  to  interruptions  which  are  attended  by  so 
much  misery? 

For  answer  to  these  questions  we  must  look  to  the  science 
of  economics.  But  it  is  frequently  said  that  in  this  field  the 
rigid  treatment  which  is  used  in  the  exact  sciences  is  not 
applicable,  because  no  given  economic  condition  affects  all  men 
alike.  This  uncertainty,  however,  cannot  account  for  the  prev- 
alence of  the  many  opposing  views  on  economic  subjects,  nor 

3 


4  FUNDAMENTAL  CONCEPTS  [i 

for  the  great  divergence  of  conclusions  derived  from  pre- 
sumably identical  premises.  Disagreement  among  men  of 
affairs  on  questions  like  Protection  and  Free  Trade  might  well 
arise  from  a  divergence  of  business  interests,  but  similar  dis- 
cord among  students  can  be  accounted  for  only  by  errors  of 
reasoning. 

Differences  in  the  disposition  of  men  who  compose  the  body 
social  unquestionably  introduce  a  difficulty  in  the  study  of 
economics,  but  this  difficulty  cannot  be  greater  than  that  met 
with  in  the  theory  of  chance.  An  illustration  will  make  this 
clear. 

A  marksman  firing  a  large  nimiber  of  shots  at  a  target  will 
find  the  bullet  holes  spread  over  it,  clustered  thickly  near  the 
centre  and  more  widely  scattered  toward  the  circumference 
(43,  329).^  If  the  shots  are  fired  imder  normal  conditions, 
measurements  will  show  that  the  geometric  centre  of  all  the 
marks  practically  coincides  with  the  bull's-eye.  If,  on  the 
other  hand,  abnormal  conditions  prevail,  unknown  to  the 
marksman,  such  as  a  steady  cross  wind,  the  geometric  centre 
of  the  shots  will  be  displaced  precisely  as  much  as  a  single  shot 
would  be  deflected,  had  it  been  aimed  true. 

Although  the  presence  of  constant  disturbing  factors  is  not 
revealed  by  a  single  shot,  owing  to  uncertainty  in  the  aim, 
nevertheless  a  large  number  of  shots  will  plainly  disclose  the 
existence  of  extraneous  influences.  While  it  is  impossible  to 
predict  where  a  single  shot  will  hit,  even  though  all  conditions 
are  known,  the  average  location  of  a  large  number  of  shots  can 
be  definitely  calculated  from  the  velocity  of  the  wind  or  the 
intensity  of  any  other  known  disturbing  influence. 

So  in  economic  questions  it  is  hopeless  to  forecast  in  in- 
dividual cases  what  would  result  from  given  conditions.  The 
personal  differences  in  men  introduces  uncertainty,  just  as 
the  unsteadiness  of  the  hand  of  the  marksman  disperses  the 
shots.  But  this  fact  does  not  preclude  the  possibility  of  formu- 
lating the  rules  that  govern  the  general  trend  or  average  effect 
of  any  given  cause,  however  variable  its  effect  may  be  in  in- 

^  Bee  note  concerning  references  on  page  preceding  Chapter  I. 


2]  INTRODUCTION  6 

dividual  cases.     To  determine  these  rules  it  is  necessary  that 
only  the  essential  factors  be  taken  into  consideration,  while  the 

I  merely  incidental  influences  are  left  out  of  account,  or,  as  in 
our  illustration,  that  we  distinguish  between  the  steady  wind 
which  affects  all  the  bullets  alike,  and  the  quivering  of  the  hand 
which  accounts  for  the  scattering  (215).    By  considering  only 

J  the  constant  forces  and  leaving  out  of  account  the  momentary 
factors,  conclusions  can  be  reached  which,  while  not  applicable 

1  to  every  individual  case,  are  yet  true  as  regards  the  conditions 
generally.  To  find  general  laws,  then,  is  all  we  can  expect  to 
accomplish,  and  if  this  is  kept  in  view,  there  can  be  no  room 
for  disagreement  in  the  deductions  obtained  from  accepted 
premises. 

2.  Theory  and  Practice. — In  his  endeavor  to  obtain  from 
surrounding  nature  with  the  least  exertion  all  that  can  make 
life  enjoyable,  man  has  learned  to  make  the  powers  of  nature 
subservient  to  his  desires.  This  has  been  achieved  principally 
through  the  advances  made  in  science  and  the  arts.  By  study- 
ing facts,  the  relation  that  exists  between  cause  and  effect  has 
been  found  and  formulated  into  "laws,"  and  these  make  it 
possible  to  foresee  what  must  result  if  certain  known  causes 
are  at  work,  and  also  to  show  the  way  to  utilize  the  forces  of 
nature  when  certain  results  are  desired.  Theory  based  on 
ascertained  facts  has  been  an  important  factor  in  the  process 
through  which  we  liave  obtained  mastery  over  the  powers  of 
nature,  and  since  true  theory  is  founded  on  an  accurate  under- 
standing of  facts,  such  theory  must  be  ])ome  out  in  practice. 

It  is,  however,  quite  natural  that  mistakes  are  occasionally 
made.  When  theories  are  founded  on  a  misinterpretation  of 
facts,  or  when  sound  theories  are  incorrectly  applied,  the 
reasoning  must  lead  to  faulty  conclusions.  It  thus  happens 
only  too  often  that  what  is  supposed  to  be  tnie  in  theory  is  not 
confirmed  by  the  facts. 

This  hjus  thrown  more  or  less  dou])t  on  the  utility  of 
theoretical  deduction,  particularly  where,  in  addition,  a  known 
cause  is  found  not  to  produce  the  same  effect  in  different 
cases.  Failure  in  the  application  of  theory  should,  liowever, 
inspire  caution  rather  than  distrust  in  the  efficacy  of  deductive 


6  FUNDAMENTAL  CONCEPTS  [s 

reasoning.  The  fact  that  this  method  has  often  been  misapplied 
is  no  reason  why  it  should  be  rejected  in  the  investigation  of 
phenomena  which  the  inductive  method  has  failed  to  explain. 

There  are  cases  where  a  certain  effect  is  due  to  a  combina- 
tion of  several  different  causes.  Such  cases  can  be  effectively 
investigated  only  by  considering  each  of  the  different  causes 
separately.  It  is  then  often  found  that  some  one  of  the  causes 
at  work  is  the  predominant  factor,  and,  in  order  to  analyze 
the  conditions,  the  minor  and  merely  modifying  causes  are 
primarily  left  out  of  consideration.  Conclusions  so  derived 
are  known  as  "theoretical"  results,  and  these  cannot,  of 
course,  be  expected  to  agree  more  than  approximately  with 
the  actual  facts.  If  subsequently  in  any  given  case  the  omitted 
factors  are  also  taken  into  account,  the  theoretical  result  is 
thereby  corrected  and  is  then  generally  found  to  be  in  prac- 
tical agreement  with  the  facts.  Thus  the  engineer  computes 
the  power  of  a  steam  engine  he  is  designing  by  first  considering 
the  propelling  power  of  the  steam,  and  from  this  he  deduces 
the  theoretical  horse-power.  But  since  this  amount  is  reduced 
by  friction,  the  loss  so  incurred  must  be  subtracted  from  the 
fii*st  result  to  obtain  the  effective  power. 

Discrepancies  between  theoiy  and  practice  which  are  due  to 
incomplete  analysis  do  not  prove  that  the  theory  is  wrong. 
There  are  in  fact  many  problems  that  can  be  solved  only  by 
dealing  primarily  with  the  dominant  factors  of  the  case  and 
considering  the  minor  factors  only  so  far  as  they  modify  the 
effect  of  the  dominant  cause.  Most  notable  of  this  class  of 
problems  are  those  of  economics,  and  we  shall  therefore  pursue 
this  course  in  treating  the  subject  before  us. 

3.  Induction  and  Deduction. — As  already  noted,  the 
method  of  deductive  reasoning  in  the  study  of  economics  has 
been  held  to  be  unreliable  for  the  reason  ihat  all  men  do  not 
react  alike  to  the  same  i  -Ipulses.  It  is  therefore  assumed  that 
this  study  must  begin  with  observation  of  facts  and  classifica- 
tion of  statistics,  from  which  to  determine  the  cause  or  causes 
that  produce  the  observed  results.  In  other  words,  it  is  held 
that  only  inductive  reasoning  from  observed  facts  can  lead  to 
reliable  conclusions. 


3]  INTRODUCTION  7 

However  valid  the  conclusions  of  inductive  reasoning  may 
be  in  some  instances,  the  fact  remains  that  if  the  methods  of 
deductive  reasoning  were  to  be  excluded  from  the  study  of 
economics,  this  science  would  be  of  no  practical  use.  Induction 
is  a  process  of  reasoning  from  effect  to  cause,  necessary  for 
discovering  laws  of  nature,  while  deduction  is  a  process  of 
reasoning  from  cause  to  effect,  applied  in  utilizing  the  knowl- 
edge already  acquired,  either  for  the  purpose  of  learning  what 
result  must  follow  from  given  conditions,  or  what  conditions 
are  requisite  for  the  attainment  of  a  desired  result.  The  two 
methods  are  complementary.  In  fact,  when  through  the  process 
of  inductive  reasoning  a  law  of  nature  has  been  discovered,  it 
should  stand  the  test  of  deductive  application  to  all  cases 
within  its  province.  When  Isaac  Newton,  by  observing  cer- 
tain facts,  discovered  what  appeared  to  him  a  general  law  of 
gravitation  and  put  it  to  a  test  by  trying  to  explain  the 
orbital  motion  of  the  moon,  he  found  a  discrepancy  that  made 
him  hesitate  in  accepting  his  inference.  Many  years  later, 
when  a  new  measurement  of  the  earth's  diameter  disclosed  de- 
cided inaccuracies  in  former  measurements,  he  repeated  his 
computation  on  the  new  basis  and  found  that  the  discrepancy 
disappeared.  Then  only  did  he  feel  justified  in  proclaiming 
his  discovery  to  the  world.  He  did  not  accept  the  law  which 
the  inductive  method  suggested  to  his  mind  before  he  had 
verified  it  by  deductive  application  in  a  crucial  test. 

If  all  theories  were  similarly  tested  before  their  acceptation, 
the  widespread  distrust  of  theory,  especially  in  economics, 
would  never  have  gained  ground.  But  it  appears  that  in 
many  instances  students  of  economics,  legislators,  and  par- 
ticularly would-be  social  reformers  fail  to  take  this  precaution. 
Imbued  with  the  notion  that  economic  laws  can  be  discovered 
only  through  studying  statistics,  they  rely  too  much  on  these 
and  base  their  plans  of  reform  on  theories  which  have  no 
other  foundation  than  the  mere  coincidence  of  certain  facts. 
That  opposite  theories  are  often  based  on  the  same  set  of 
statistics,  by  merely  picking  out  different  sots  of  coincidences, 
shows  how  easy  it  is  to  be  misled  by  methods  of  induction  and 
how  discrepancies  in  economic  theory  are  apt  to  originate. 


8  FUNDAMENTAL  CONCEPTS  [4 

Furthermore,  in  the  effort  to  prove  a  point,  recourse  is 
often  had  to  voluminous  quotation  from  various  authorities. 
This  is  apt  to  degenerate  into  dogmatism,  which  is  out  of  place 
in  the  scientific  treatment  of  any  subject.  Parallel  quotations 
are  quite  in  order  as  serving  to  show  that  certain  propositions 
have  been  propounded  before,  but  not  if  they  are  offered  as 
proof  of  the  validity  of  any  proposition.  Every  demonstra- 
tion should  be  conclusive  in  itself  and  should  not  require  an 
appeal  to  extraneous  authority  for  confirmation.  A  scientific 
truth  cannot  he  established  by  a  majority  vote. 

4.  Plan  of  Present  Investigation. — As  already  stated,  the 
primary  object  of  the  present  investigation  is  to  learn  the 
cause  of  financial  crises  and  the  attendant  business  depressions, 
and  its  aim  is  to  find  a  remedy.  The  subject  being  clearly 
within  the  province  of  economics,  the  most  promising  course 
is  to  begin  with  first  principles  and  consistently  to  pursue  the 
search,  wherever  it  leads,  no  matter  whether  the  conclusions 
agree  or  conflict  with  accepted  views.  Before  entering  upon 
the  inquiry  we  should  clearly  understand  the  scope  of 
economics,  and  the  following  is  a  comprehensive  statement  of 
the  case. 

The  subject  of  economics  comprises  those  social  relations 
which  arise  in  the  course  of  the  co-operative  efforts  of  men  to 
satisfy  their  needs  and  gratify  their  desires.  A  clear  under- 
standing of  these  relations  is  necessary  in  order  properly  to 
determine  what  laws  and  conventions  will  promote  the  general 
well-being. 

The  first  part  of  the  present  treatise  is  devoted  to  laying  an 
adequate  foundation  for  the  subsequent  investigation.  To  this 
end  the  chief  elemental  factors,  as  ''right,"  "ownership," 
"value,"  "credit,"  "money,"  are  sharply  defined  and  the 
conceptions  analyzed. 

The  second  part  comprises  a  study  of  the  processes  by 
w^hich  the  value  of  the  products  of  industry  is  apportioned 
among  the  agents  of  production.  The  inquiry  is  directed 
particularly  toward  finding  what  determines  the  sharing  of 
the  products  or  their  value  between  the  workers,  on  the  one 


4]  INTRODUCTION  9 

hand,  and  the  owners  of  the  material  with  which  they  work, 
including  land,  on  the  other. 

In  the  third  part  follows  a  study  of  the  principal  socio- 
political factors  which  obstruct  economic  development.  This 
examination  leads  to  a  recognition  of  the  fundamental  cause 
of  business  depressions. 

The  fourth  part  comprises  several  chapters,  in  the  first  of 
which  the  conclusions  reached  in  the  preceding  chapters  are 
utilized  in  pointing  to  ways  and  means  for  removing  the  cause 
of  business  depressions.  The  second  is  devoted  to  a  considera- 
tion of  the  natural  consequences  of  such  a  course.  The  closing 
chapter  contains  a  review  of  current  economic  doctrines  in  the 
light  of  the  conclusions  derived  in  our  examination. 

In  the  treatment  of  the  subject,  which,  as  already  stated, 
proceeds  on  lines  of  deductive  reasoning,  mathematical 
methods  are  utilized  wherever  found  advantageous,  but  noth- 
ing more  complex  than  elementary  algebraic  formulas  and 
simple  analytical  diagrams  is  employed.  An  earnest  effort  is 
made  to  avoid  abstruseness,  so  that  the  reader  will  be  able  to 
follow  the  argument  with  ease  and  to  pass  judgment  for  him- 
self upon  the  validity  of  the  conclusions. 


CHAPTER  II 

PRODUCTION  AND  CONSUMPTION 

5.  Motives  of  Human  Activity. — Before  entering  upon  the 
examination  of  the  relations  between  men  arising  in  the  course 
of  their  co-operative  efforts,  a  brief  survey  of  the  motives  of 
human  activity  will  prepare  us  better  to  understand  the  later 
investigation.  We  shall  first  touch  upon  the  reasons  why  men 
exert  themselves,  and  especially  why  they  prefer  to  work  in 
co-operation.  These  reasons  are  independent  of  the  form  of 
social  organization;  they  exist  whether  individual  freedom 
prevails  or  whether  men  are  bound  together  in  some  socialistic 
or  communistic  association.  We  are  now  dealing  with  the 
relations  that  exist  between  man  and  nature,  and  not  with 
those  which  arise  between  man  and  man. 

The  impulse  to  exertion  springs  from  human  needs  and 
desires.  The  means  through  which  these  needs  and  desires 
can  be  satisfied  are  furnished  by  nature,  but  these  are  always 
in  such  a  form  that  their  utility  is  not  available  without 
human  effort.  Even  wild  growing  fruit  must  be  gathered.  In 
most  cases  the  labor  required  is  more  or  less  complex,  a  number 
of  successive  operations  being  necessary  to  prepare  the 
products  of  nature  for  man's  requirements. 

6.  The  Process  of  Developing  Utilities. — Utility,  namely, 
the  capability  of  things  to  satisfy  needs  or  gratify  desires  (24), 
is  present  in  the  materials  furnished  by  nature  in  a  latent  or 
immature  state,  and  the  procedure  which  makes  it  available 
can  aptly  be  likened  to  a  maturing  process.  Similarly, 
products  in  their  more  or  less  advanced  stages,  as  well  as  in 
their  natural  condition,  may  be  termed  immatured  products. 
Maturity,  in  this  sense,  is  not  attained  until  the  thing  is  ready 
for  final  use.  Sugar,  for  instance,  is  generated  by  a  vital 
process  in  plants,  particularly  in  sugar-cane,  but  to  obtain 
sugar  for  man's  purposes  the  cane  must  be  cultivated  and 
harvested,  the  juice  expressed  and  evaporated,  and  the  crystals 

10 


7]  PRODUCTION  AND  CONSUMPTION  11 

so  obtained  transported  to  refineries  where,  by  a  series  of 
chemical  and  physical  processes,  the  impurities  are  removed. 
But  even  then  the  sugar  is  not  an  economically  mature 
product.  The  grocer,  in  bringing  it  to  his  store,  performs  one 
of  the  necessary  acts,  and  a  fu^'ther  advance  is  made  when  the 
purchaser  takes  it  home.  Viewed  economically,  a  pound  of 
sugar  in  the  pantry  is  more  nearly  mature  than  an  equal 
quantity  at  a  grocer's  or  at  a  refiner's.  And  even  in  the  pantrj' 
it  is  not  fully  matured,  for  the  labor  of  the  cook  is  required  to 
make  it  a  constituent  of  the  food  in  which  it  will  be  finally 
applied  to  its  ultimate  use. 

7.  Production. — The  process  termed  "production,"  by 
which  utilities  are  developed  or  matured,  not  only  embraces 
the  vital,  the  physical,  and  the  chemical  changes  of  the  wealth- 
forming  material,  but  also  those  transfers  from  place  to  place 
and  from  hand  to  hand,  through  which  the  things  are  forwarded 
toward  consumption. 

Every  product  of  nature  has  a  range  of  utilities  peculiar 
to  itself.  Only  such  utilities  as  are  included  in  this  range  can 
be  developed  by  labor.  Utilities  cannot  be  created;  they  can 
only  be  developed  where  they  exist  in  potential  form.  Iron 
can  be  obtained  only  from  ores  containing  iron.  Sand  cannot 
be  twisted  into  a  rope,  no  matter  how  much  labor  may  be 
applied.  And  in  materials  possessing  capabilities  of  the  same 
kind,  differences  exist  by  reason  of  which  different  amounts 
of  effort  are  required  to  make  them  useful.  It  takes  more 
labor  to  obtain  copper  from  ores  in  the  form  of  oxides  tlian 
from  those  containing  copper  in  a  native  state.  The  growing 
of  agricultural  produce  takes  more  labor  on  sterile  than  on 
fertile  soil.  Such  specific  differences  can  be  taken  into  account 
by  considering  all  these  products  as  being  furnished  by  nature 
in  different  stages  of  maturity,  some  recjuiring  more,  others 
less  labor  to  develop  their  utility  (180).  It  thus  happens  that 
many  products  of  nature  in  their  native  state  are  as  nearly 
mature  as  other  products  to  which  more  or  less  labor  has 
already  been  applied. 


12  FUNDAMENTAL  CONCEPTS  [8, 9 

8.  Labor  Defined. — In  economic  discussion  the  word  "la- 
bor" should  be  understood  as  denoting  all  human  efforts 
directed  to  a  useful  end.  These  efforts  may  be  of  a  manual  or 
of  a  mental  nature.  All  efforts  are  labor,  in  so  far  as  their  aim 
is  the  development  or  preservation  of  utilities,  or  as  they  are 
directed  towards  satisfying  some  need  or  desire.  In  the  mean- 
ing of  this  term  are  to  be  included  not  only  the  efforts  of  tillers 
of  the  soil,  miners,  artisans,  carriers,  but  also  those  of  directors 
of  industrial  enterprises,  merchants  and  clerks,  teachers  and 
preachers,  musicians  and  actors,  doctors  and  lawyers ;  in  short, 
all  services  that  are  in  demand.  In  modem  progress  ever- 
increasing  importance  attaches  to  mental  labor,  for  manual 
labor  is  made  vastly  more  effective  through  the  directing  effort 
of  mind. 

g.  Labor  Embodied  in  Products. — As  a  rule  there  is  a 
greater  or  less  interval  of  time  between  a  productive  effort  and 
the  gratification  to  be  obtained  through  it.  This  becomes  pos- 
sible through  the  capability  of  matter  to  retain,  at  least  for  a 
time,  the  impress  of  labor  applied  to  it.  It  may  be  said  that 
matter  absorbs  and  preserves  the  labor  through  which  utilities 
are  advanced  toward  maturity.  Such  matter,  then,  becomes 
the  embodiment  of  labor  and  the  mediiun  through  which  the 
services  rendered  by  labor  can  be  conserved  and  transferred  at 
pleasure  from  place  to  place  and  from  one  person  to  another. 

The  capacity  to  absorb  and  retain  the  effect  of  labor  is  not 
confined  to  inanimate  things  alone,  but  is  also  present  in  the 
physical  and  mental  attributes  of  man.  The  mother  teaches 
the  child  the  rudiments  of  knowledge,  the  teacher  imparts 
general  and  specialized  instruction,  the  discoverer  widens  the 
horizon  of  our  understanding,  and  the  inventor  broadens  the 
scope  of  our  capacities.  It  is  by  education  and  training  that 
man  is  prepared  to  perform  his  work,  and  by  practice  that  his 
skill  is  developed. 

The  term  "unproductive  labor"  is  frequently  applied  to 
efforts  such  as  dramatic  performances,  the  rendering  of  music, 
delivery  of  lectures,  and  so  forth.  But  the  only  essential  dif- 
ference between  these  and  other  productive  efforts  consists  in 
the  difference  of  time  which  elapses  between  the  moment  of 


10]  PRODUCTION  AND  CONSUMPTION  18 

production  aud  that  of  consumption.  Although  in  such  cases 
production  and  consumption  are  unavoidably  simultaneous, 
the  performance  of  such  labor  includes  all  the  features  of  the 
process  of  production.  All  products  of  labor  being  more  or 
less  perishable,  the  distinction  between  so-called  productive 
and  unproductive  labor  is  in  the  last  analysis  only  a  matter 
of  time,  and  the  term  "unproductive"  is  therefore  a  misnomer. 

10.  Means  of  Production. — The  modern  processes  of  pro- 
duction are  generally  complex  and  are  characterized  by  the 
proportionately  large  amount  of  labor  devoted  to  the  making 
of  things  that  are  not  destined  to  become  integral  parts  of 
the  final  product,  and  which,  in  fact,  serve  only  as  means  of 
completing  that  final  product.  AYhether  these  means  of  pro- 
duction be  tools,  machines,  factories,  railroads,  stores,  and  so 
forth,  they  are  in  themselves  incapable  of  satisfying  ultimate 
needs  or  desires.  Nevertheless  they  are  produced  for  that 
purpose  and  with  that  end  in  view.  The  making  of  a  trowel 
is  a.s  truly  a  step  toward  the  building  of  brick  houses  as  is 
the  making  of  the  bricks;  but  though  the  trowel  itself  is  a 
finished  implement,  its  utility  is  only  potential  or  immature, 
for  its  purpose  is  the  house,  which  is  the  thing  possessing  the 
ultimate  utility.  The  object  of  making  a  loom  is  to  produce 
garments,  and  the  maker  of  the  loom  assists  in  the  manufacture 
of  all  the  cloth  that  will  ever  be  woven  on  this  machine.  In 
the  economic  sense,  the  labor  spent  in  building  the  loom  is 
absorbed  by  the  cloth  as  the  loom  gradually  wears  out  (14, 
132,153,197). 

In  the  endeavor  to  increase  the  efficiency  of  labor  the 
means  and  methods  of  production  have  been  improved  and 
multiplied.  As  a  result  they  have  become  more  and  more 
complex,  and  an  endless  variety  of  ways  of  accomplishing  the 
same  end  have  come  into  use  (156a).  As  a  rule,  every  in- 
crease in  the  efficiency  of  labor  is  coincident  with  greater  com- 
plexity in  the  method.  It  does  not  follow,  however,  that  every 
expansion  in  the  means  and  methods  of  production  yields  in- 
creased advantages.  Just  here  the  intelligence  and  fore- 
thought of  man  becomes  an  all-important  factor,  for  even  in 
the  effort  for  betterment  excess  is  not  impossible.     Improve- 


14  FUNDAMENTAL  CONCEPTS  [ii.  12 

ment  of  appliances,  for  instance,  can  be  of  advantage  only  if 
the  extra  cost  of  making  and  maintaining  the  improvement 
does  not  exceed  the  saving  that  can  be  effected  thereby.  Other- 
wise the  use  of  such  improvement  becomes  a  source  of  loss 
(156&). 

11.  Specialization  of  Labor. — In  the  application  of  means 
of  production  both  specialization  of  industry  and  co-operation 
are  almost  always  involved.  Long  before  the  invention  of 
labor-saving  machines  it  was  recognized  that  great  advantages 
could  be  gained  by  each  worker  acquiring  skill  in  some  one 
trade  and  restricting  his  activity  to  that  specialty.  "With  the 
introduction  of  modem  appliances  the  specialization  of  work, 
or,  as  it  is  more  generally  called,  the  division  of  labor,  has 
been  carried  into  the  minutest  details  of  every  industry,  and 
this  has  necessarily  been  attended  by  co-operation,  so  that  now 
in  many  branches  thousands  of  workmen  are  employed  under 
one  direction.  In  this  way  the  application  of  machinery,  the 
specialization  of  labor,  and  the  aggregation  of  workers  com- 
bined bring  about  the  vast  increase  of  productivity  which 
characterizes  the  present  age. 

12.  Distribution  a  Factor  in  Labor  Specialization. — There 
is,  however,  one  factor  that  in  some  measure  reduces  the  gain 
derived  from  the  division  of  labor.  All  systems  of  specialized 
production  necessitate  the  additional  labor  of  distribution,  and 
this  is  particularly  marked  in  the  modern  industrial  world. 
The  work  of  the  transporter  and  of  the  distributer  is  indis- 
pensable. But  the  gain  from  the  division  of  labor  far  exceeds 
the  cost  of  this  work. 

The  work  of  transportation  has  brought  into  existence 
some  gigantic  organizations,  particularly  since  the  advent  of 
the  locomotive  and  the  steamship ;  and  the  work  of  distribution 
requires  the  labor  of  countless  merchants  and  tradesmen  in 
collecting  the  great  staple  articles  in  wholesale  centres  and 
effecting  their  distribution  to  the  consumers  through  retail 
channels. 

A  part  of  the  merchant's  business  is  to  bring  his  goods  to 
the  notice  of  the  public,  which  he  may  do  in  various  ways, 
generally  by  exposing  them  to  view  or  by  advertisement.   The 


13.  14]        PRODUCTION  AND  CONSUMPTION  15 

prospective  purchasers  are  thereby  informed  where  certain 
goods  can  be  obtained.  The  labor  devoted  to  disseminating 
this  infonnation  is  manifestly  part  of  the  labor  of  distribution. 
Simply  placing  an  article  in  a  store  where  such  things  are 
known  to  be  sold  imparts  to  it  a  share  of  this  labor,  and  its 
utility  is  thus  advanced  a  step  nearer  to  maturity  (217). 

13.  Waste  Attending  Production. — There  is  one  more 
factor  that  is  worth  considering  at  this  point.  The  output  of 
products  is  often  diminished  by  unavoidable  waste  as  well  as 
by  accident.  In  many  branches  of  industry  loss  is  unavoid- 
able through  some  part  of  the  products  becoming  useless  in 
the  process  of  manufacture  and  distribution  (58),  and  all 
efforts  toward  preventing  or  reducing  loss  of  any  kind  are  on 
a  par  with  productive  labor.  In  spite  of  the  utmost  effort 
waste  will  occur,  and  the  best  that  can  be  done  is  to  minimize 
it.  But  this  cannot  economically  be  carried  beyond  the  point 
where  the  saving  will  compensate  for  the  labor  involved  (219) . 

14.  Consumption. — In  the  process  of  production  material 
is  prepared  for  the  purpose  of  meeting  human  needs.  In  the 
process  of  consumption  the  products  so  prepared  fulfil  this 
purpose.  In  common  parlance  the  latter  tenn  is  generally 
used  only  in  connection  with  food  and  drink,  but  we  must 
here  understand  it  in  a  broader  sense.  Thus  not  only  food, 
but  also  clothing,  furniture,  houses,  in  short,  all  products  of 
labor,  undergo  consumption  when  they  are  used  to  satisfy 
human  wants. 

As  a  rule,  every  step  in  the  process  of  consumption  brings 
about  a  partial  or  complete  destruction  of  that  utility  which 
was  developed  in  the  process  of  production.  Food,  viewed  as 
an  economic  product,  is  totally  destroyed  when  it  is  eaten 
Clothes,  when  worn,  deteriorate  by  degrees  until  they  are 
finally  worn  out.  Even  goods  of  a  more  durable  nature,  such 
as  furniture  and  houses,  cannot  stand  the  wear  and  tear  of 
use  forever.  Such  examples  show  that  the  amount  of  utility 
stored  up  in  products  is  limited  and  decreases  with  every  act 
of  utilization. 

Putting  products  to  use  is,  however,  not  the  only  cause 


16  FUNDAMENTAL  CONCEPTS  [u 

of  their  deterioration.  Not  only  are  the  elements  of  nature 
constantly  at  work  to  impair  the  utility  of  things  by  gradual 
decay,  but  the  danger  of  accident  threatens  their  existence. 
An  uninhabited  building  will  in  time  fall  into  ruin  as  surely 
as  one  that  is  occupied,  unless  kept  in  repair.  An  abrupt 
ending  may  come  to  things  through  various  forms  of  accident, 
through  fire  or  water,  through  storm  or  earthquake.  Although 
most  of  man's  works  escape  accidental  destruction,  there  are 
few  things  which  do  not  succumb  to  the  slow  but  certain 
ravages  of  time. 

It  is  generally  within  man's  power  to  ward  off  the  inroads 
of  nature  by  protective  means,  and  also  to  mend  the  effects  of 
wear  and  tear.  The  process  of  repairing  or  of  renovating 
things  is  nothing  more  than  restoring  the  utilities  which  have 
been  partly  lost  through  use  or  decay. 

From  the  economic  viewpoint  the  means  of  production, 
such  as  tools  and  machines,  possess  utility  only  in  a  potential 
or  immature  form.  While  being  used  up  in  the  course  of 
their  utilization,  they  do  not  satisfy  any  ultimate  desire. 
Their  wearing  out  has  a  significance  radically  different  from 
the  using  up  of  matured  products  in  satisfying  human  needs. 
In  both  cases,  to  be  sure,  things  are  destroyed,  but  in  the  one 
ease  the  potential  utility  of  the  implements  is  transferred  in  a 
more  advanced  form  to  the  products  that  are  being  made  (10), 
while  in  the  other  ease  mature  utilities  disappear.  The  wear- 
ing out  of  tools  is  part  of  the  process  of  production ;  the  using 
up  of  mature  products  constitutes  the  process  of  consumption. 
Means  of  production  may  deteriorate  by  use  or  meet  with 
accidental  destruction,  but  they  cannot  be  "consumed." 

We  have  thus  far  considered  only  the  relations  between 
man  and  nature  and  will  next  take  up  the  relations  between 
man  and  man,  the  real  subject-matter  of  political  economy. 


CHAPTER  III 
THE  SOCIAL  COMPACT 

15.  The  Elements  of  Association. — In  order  to  obtain  a 
clear  conception  of  the  economic  relations  existing  in  society, 
we  must,  first  of  all,  make  ourselves  acquainted  with  the 
elements  among  which  economic  relations  exist. 

The  individual  person  is  manifestly  the  primary  element, 
the  atom,  of  the  economic  organism,  and  in  primitive  com- 
munities this  is  perhaps  the  only  economic  entity  that  need 
be  considered.  But  in  modei*u  society,  with  its  complex 
systems  of  production  and  specialization  of  work  involving 
co-operative  effort,  we  shall  have  to  deal  with  groups  as 
entities  in  which  the  individual  is  absorbed  and  his  identity 
practically  lost.  As  atoms  combine  and  form  molecules  which 
possess  properties  peculiar  to  themselves,  so  may  individuals 
group  themselves  into  composite  bodies  which  are  to  be  treated 
as  economic  persons. 

16.  Composite  Persons. — Such  groupings  occur  in  the 
business  world  in  the  form  of  partnerships  composed  of  sev- 
eral individuals,  of  stock  companies  composed  of  larger 
numbers,  and  of  consolidations  of  such  companies  in  various 
forms  of  organization.  These  combinations  assume  the  char- 
acter of  distinct  persons  or  entities,  entering  into  business 
relations  with  individuals  or  with  other  composite  persons^ 
(67).  An  individual  member  of  a  partnership  may  even  do 
business  with  the  latter,  or  an  individual  stockholder  with  the 
company  in  which  he  holds  stock.  Since  our  investigation^ 
refers  to  general  economic  rather  than  to  specific  business 
relations,  we  must  go  farther  and  recognize  yet  other  entities 
consisting  of  aggregates  of  individuals.  For  instance,  all 
men  identified  with  a  business  organization,  such  as  employer, 
foremen,  bookkeepers  and  workmen,  as  well  ns  capitalist  and 
landowner,  or  stock  and  l)ondho]ders,  compose  a  productive 
group.     Furthermore,  when  comparing  the  interests  of  cm- 

2  17 

V 


18  FUNDAMENTAL  CONCEPTS  (17 

ployers  with  those  of  the  employed,  or  when  examining  the 
economic  status  of  landowners,  of  capitalists,  or  of  money- 
lenders, it  is  necessary  to  treat  such  classes  as  economic 
entities. 

Whenever  the  external  relations  of  such  entities  are  under 
discussion,  the  relations  existing  between  the  individuals  com- 
posing them  must  be  left  out  of  account.  And  when  dealing 
with  internal  relations,  namely,  those  among  the  individual 
members  of  a  group,  these  must  be  examined  independently 
of  external  relations. 

In  view  of  the  fact  that  a  single  person  may  be  a  member 
of  a  number  of  these  groups,  we  have  to  consider  not  only 
economic  persons  in  the  form  of  these  groups,  but  also  such  as 
take  form  through  the  exercise  of  separate  economic  functions 
by  the  same  individual.  Just  as  a  man  may  divide  his  activity 
by  being  manager  of  a  business,  director  of  a  bank,  and 
treasurer  of  an  association,  so  a  workman  may  be  landlord,  if 
he  owns  a  house  which  he  rents  out;  capitalist,  if  he  o\^^ls 
shares  of  railroad  stock ;  money-lender,  if  he  has  a  deposit  in 
a  savings  bank,  A  man 's  interest  in  one  capacity  may  indeed 
be  opposed  to  his  interest  in  another.  It  is  just  because  one 
man  may  at  once  be  employer,  workman,  capitalist,  money- 
lender, landowner,  and  what  not,  that  in  the  investigation  of 
these  economic  functions  and  of  the  relations  between  any  two 
of  them  we  are  to  consider  each  of  these  functions  as  repre- 
sented by  a  separate  economic  being,  irrespective  of  the  real 
persons  by  whom  the  functions  are  exercised.  We  must 
personify  the  functions  and  treat  them  as  though  they  were 
individuals  (56,  247). 

17.  Rights,  the  Bonds  of  Association. — Economic  relations 
in  society  exist  usually  in  the  form  of  ' '  rights ' '  and  ' '  duties. ' ' 

Ordinarily  the  word  "right"  is  used  in  so  many  senses 
that  it  is  necessary  sharply  to  define  the  meaning  in  which  it 
is  to  be  used  in  economies.  We  hear  of  moral,  of  legal,  of 
natural,  of  inalienable  rights,  and  so  forth,  each  having  a 
different  meaning.  For  illustration,  a  Jewish  merchant  con- 
siders that  he  has  a  moral  right  to  keep  his  store  open  on 


171  THE  SOCIAL  COMPACT  19 

Sunday,  but  he  has  no  legal  right  to  do  so  where  Sunday  laws 
forbid.  When  we  examine  the  significance  of  the  word  "right" 
thus  variously  qualified,  we  recognize  "moral  right"  as  apply- 
ing to  conduct  which  does  not  violate  what  is  regarded  as  good 
morals,  "legal  rights"  as  applying  to  all  that  which  is  in  con- 
formity with  both  common  and  statutory  law,  "natural  right" 
as  referring  to  whatever  is  not  contrary  to  natural  law,  etc. 
The  idea  underlying  them  all  in  common  is  freedom  to  act 
within  the  bounds  imposed  respectively  by  dictates  of  morals, 
of  laws,  of  nature.  The  essence  of  right,  then,  is  absence  of 
restraint,  and  rights  can  be  conceived  only  by  contrast  with 
those  restrictions  which  limit  freedom.  Thus,  travel  on  private 
land  being  forbidden,  the  use  of  the  highway  becomes  a  right 
by  contrast.  To  lay  conduits  under  the  streets  of  a  city  is 
forbidden  to  all  except  those  to  whom  a  special  right  is  given 
by  franchise. 

Ethical  considerations  were  no  doubt  the  original  motive 
for  regulating  individual  conduct,  and  only  because  men's 
judgment  difi'ered  as  to  what  was  right  or  wrong  was  it  neces- 
saiy  to  arrive  at  conventional  agreements  and  formulate  these 
into  law} 

It  is  true,  a  sense  of  right  and  wrong  existed  even  in 
primitive  society  before  laws  were  written  or  courts  estab- 
lished. Rights  then  existed  by  dint  of  common  or  unwritten 
law,  and  when  laws  came  to  be  formulated  and  enacted  they 
were  little  else  than  unwritten  law  put  in  stated  form.  In 
this  way  legal  rights  were  born  of  moral  rights.  The  Ten 
Commandments  are  among  the  oldest  of  our  laws,  and  these 
have  been  supplemented  by  both  ecclesiastic  and  secular  enact- 
ments, so  that  now  our  system  of  law  is  exceedingly  com- 
plicated. 

*  In  the  use  of  the  term  "  law  "  we  must  guard  against  possible 
confusion,  as  it  has  two  strictly  distinct  meanings.  In  the  one  sense  it 
means  rules  regarding  the  relations  between  man  and  man,  adopted  and 
enforced  by  the  body  politic;  in  tlio  otlier  it  moans  rules  of  nature 
regarding  tlie  relation  between  cause  and  cfTect.  Thus,  "currency  laws" 
have  been  enacted  by  the  law-making  power  of  government,  while  the 
"law  of  rent"  has  merely  been  |ii(Miiiil;.'ate(l  by  its  discoverer. 


20  FUNDAMENTAL  CONCEPTS  [18 

There  have  been  many  instances  of  the  enactment  of  laws 
which  at  a  later  period  were  recognized  as  unjust.  Yet  the 
rights  created  by  these  laws  were  accepted  as  such  and  enforced 
by  governmental  power.  Up  to  a  comparatively  recent  time  the 
right  to  own  a  slave  was  as  real  as  the  right  to  own  a  horse  or  a 
hat,  and  laws  were  enforced  to  that  effect.  The  injustice  of 
such  laws  is  now  universally  acknowledged.  In  like  manner, 
laws  which  to-day  are  considered  right  and  proper  may  to- 
morrow be  condemned  as  improper. 

1 8.  Legal  Rights. — Since  the  purpose  of  the  study  of 
economics  is  to  determine  what  public  policy  is  most  conducive 
to  the  general  welfare  of  the  community,  it  is  only  legal  rights 
that  concern  us  here,  and  among  these  we  can  distinguish  two 
categories. 

The  one  class  comprises  such  rights  as  exist  by  implication 
instead  of  by  specification,  and  which  therefore  require  no 
statutory  definition.  Every  person  has  legal  right  to  do  that 
which  is  not  contrary  to  law.  As  regards  such  rights,  laws  do 
not  say  what  may  be  done ;  they  only  specify  that  which  may 
not  be  done. 

The  other  class  comprises  such  rights  as  are  brought  into 
existence  through  special  exemption,  granted  to  one  or  more 
persons,  from  restraint  imposed  upon  others,  that  is  to  say, 
through  grant  of  special  privilege  to  do  what  is  forbidden  gen- 
erally. Laws  creating  such  rights  specify  what  may  be  done, 
in  other  words,  the  extent  of  the  exemption  from  general 
restraint. 

The  difference  may  be  noted  by  contrasting  the  general 
right  to  drive  a  team  on  a  public  highway  with  an  exclusive 
right  to  construct  and  operate  a  car  line  on  the  same  road. 
The  first  is  a  right  existing  because  of  the  absence  of  legal  in- 
terdiction, while  the  second  is  a  right  because  legal  inter- 
diction is  placed  on  all  but  those  excepted  therefrom  (226). 
In  the  latter  class  are  really  embraced  other  rights  than  those 
which  are  commonly  known  as  franchises  or  privileges,  for 
the  right  of  o^raership,  patent  and  copyrights,  the  right  of 
creditors  and  so  forth,  bear  the  same  characteristics.  Such 
rights  are  creations  of  law  in  the  sense  that  law  and  the  power 
behind  it  are  requisite  to  impose  restraint  of  freedom  on  all  but 


19, 20]  THE  SOCIAL  COMPACT  21 

the  holder  or  holders  of  the  right,  whose  freedom  is  then  ex- 
ceptional or  exclusive.  Laws  of  this  kind  are  virtually  public 
expressions  of  mutual  agreements  by  which  all  members  of  the 
community  are  bound  to  acquiesce  in  the  rights  granted  by 
the  community  to  certain  of  its  members  and,  in  case  of  need, 
to  help  in  preventing  the  infringement  of  such  rights.  By  for- 
bidding and  punishing  theft  and  other  acts  of  unjust  ap- 
propriation, the  right  of  ownership  is  established.  Patent  and 
copy  rights  exist  by  virtue  of  legal  protection  against  un- 
authorized imitations  of  inventions,  or  reproductions  of  works 
of  art  or  literature. 

It  is  only  rights  of  the  second  category  which  are  de- 
pendent on  legislation,  and  therefore  they  are  the  only  ones 
which  properly  lie  within  the  scope  of  economics. 

19.  Right  and  Duty. — As  just  intimated,  such  rights  can 
exist  only  by  virtue  of  a  double  obligation  assumed  by  the 
community.  In  the  first  place,  the  people  agree  to  give  up  a 
certain  measure  of  liberty  and  to  submit  to  the  restraint  in- 
volved. In  the  second  place,  they  agree  to  give  the  needed 
protection  against  infringements  of  the  right  when  occasion 
arises.  Thus,  the  lawful  right  of  any  individual  can  subsist 
only  through  the  ohligation  or  duty  of  protecting  that  right 
assumed  by  the  community. 

The  performance  of  that  duty  is  usually  delegated  to  those 
composing  the  judicial  and  executive  departments  of  the 
state,  and  the  obligation  of  the  people  in  this  connection  is 
reduced  practically  to  the  payment  of  those  taxes  from  wb.ieh 
the  cost  of  maintaining  the  protective  machinery  is  derived. 
Those  who  pay  these  taxes  are  really  the  ones  wlio  afford  the 
protection,  the  court  and  police  officers  being  mei-ely  their 
employes. 

20.  Definition  of  Equity. — In  the  sense  in  which  we  here 
use  the  term  "right,"  it  is  the  correlative  of  "duty,"  and  the 
relation  of  right  and  duty  is  akin  to  that  of  receiving  and  giv- 
ing. Both  terms  denote  the  same  condition  presented  from 
opposite  points  of  view.  A  recognition  of  this  relation  will 
enable  us  to  obtain  a  clear  understanding  of  what  "e(iuity" 
really  means. 


22  FUNDAMENTAL  CONCEPTS  [21 

Let  us  begin  with  an  illustration.  The  victim  of  theft  can 
call  upon  the  police  and  set  the  whole  department  in  motion  to 
discover  the  thief,  and  under  like  emergency  everybody  else 
has  the  same  right.  But  there  can  be  equity  only  if  all  those 
who  have  this  right  share  uniformly  in  the  duty  of  maintain- 
ing the  protective  machinery.  Or,  take  the  case  of  a  patent 
right,  where  the  public  agrees  to  abstain  from  the  unauthorized 
use  of  the  invention  for  a  certain  number  of  years.  The  right 
thus  bestowed  on  the  inventor  becomes  equitable  from  the  fact 
that  he  renders  an  equivalent  by  fully  describing  the  invention, 
so  that  after  the  expiration  of  the  period  of  protection  anyone 
versed  in  the  art  will  be  able  to  utilize  it. 

Putting  it  briefly,  a  compact  by  which  a  right  is  bestowed 
and  a  duty  imposed  is  equitable  only  if  those  who  enjoy  the 
right  are  burdened  with  the  corresponding  or  with  some 
equivalent  duty,  and  conversely,  if  those  upon  whom  the  duty 
devolves  are  also  invested  with  the  corresponding  or  with  some 
equivalent  right.  In  other  words,  equity  demands  that  the 
distribution  of  the  heyiefits  and  burdens  of  right  and  duty  shall 
he  reciprocal,  and  laws  in  which  this  reciprocity  is  absent  or 
distorted  are  inequitable  (259,  260,  325).  Accordingly,  if  the 
right  of  ownership  is  to  be  equitable,  the  taxes  from  which  the 
cost  of  protecting  property  rights  is  defrayed  must  be  imposed 
upon  owners  without  discrimination  (228).  As  an  instance  of 
inequitable  rights  may  be  mentioned  the  right  to  own  slaves, 
now  happily  abolished.  It  was  the  slave 's  duty  to  work  for  the 
master  to  the  fullest  of  his  ability,  while  the  master 's  duty  was 
only  to  feed,  clothe  and  house  the  slave  according  to  his  own 
discretion.  In  general,  the  service  rendered  by  the  slave  ex- 
ceeded the  service  rendered  him  in  return.  In  this  institution 
reciprocity  of  right  and  duty  was  clearly  incomplete. 

21.  The  Right  of  Ownership. — By  far  the  most  important 
of  all  economic  rights,  and  the  only  one  we  shall  examine  in 
detail  at  this  stage,  is  the  right  of  ownership,  the  cornerstone  of 
civilization,  upon  which  practically  all  other  economic  rights 
rest. 

A  clear  conception  of  the  nature  of  "ownership"  can  be 
obtained  by  contrasting  it  with  "possession."    The  latter  ex- 


21]  THE  SOCIAL  COMPACT  28 

presses  a  merely  physical  relation  of  a  thing  to  a  person,  while 
the  former  is  descriptive  of  an  economic  relation.  Although 
the  owner  of  a  thing  is  generally  its  possessor,  this  is  not  a 
necessary  condition,  inasmuch  as  he  may  for  a  time  place  it  in 
possession  of  another  without  relinquishing  his  ownership  (68) . 
In  that  case  he  reserves  the  right  of  regaining  possession  at  a 
future  time,  usually  with  some  compensation  for  its  use.  In  a 
certain  sense,  the  owner  retains  comynand  of  the  thing.  We 
may  aceordingl}^  define  * ' o^^Tiership  "  as  that  economic  relation 
of  a  thing  to  its  owner  which  exists  dy  virtue  of  the  community 
protecting  the  owner,  or  those  whom  he  authorizes,  in  the  pos- 
session of  the  thing  owned.  As  stated  before,  it  is  due,  pri- 
marily, to  the  acquiescence  of  the  members  of  the  community 
in  the  undisputed  possession  or  control  of  that  which  is  an 
individual's  property  and,  secondarily,  to  the  readiness  of 
the  community  to  prevent  others  from  depriving  the  individ- 
ual of  that  possession  (67,  228,  324). 

Where  possession  is  not  subject  to  dispute,  as  in  the  case  of 
the  fictional  Robinson  Crusoe,  a  right  of  ownership,  that  is  to 
say,  an  exclusive  right  of  possession,  is  not  only  without  signifi- 
cance, but  actually  inconceivable.  Possession  in  such  case 
simply  does  not  need  to  be  protected.  Ownership  is  not  a 
natural  right,  by  virtue  of  which  the  i>roducer  of  a  thing 
becomes  its  owner.  This  right  is  invariably  a  creation  of  the 
convention  above  alluded  to.  Unless  law  establishes  this  right, 
the  producer  of  a  thing  is  not  its  owner.  It  is  true  the  present 
laws  aim  to  concede  o\v7iership  to  the  producer,  but  it  has  not 
always  been  so,  and  even  now  this  ideal  is  in  certain  respects 
not  fully  realized..  The  product  of  a  slave  belonged  to  the 
master.  When  tithes  were  collected,  only  the  product  minus 
the  tithes  was  retained  by  the  producer  as  his  property.  Where 
taxes  are  collected  on  incomes,  the  producer  has  not  the  right 
of  ownership  to  his  entire  productions.  Land  can  be  subject 
to  ownership  only  by  virtue  of  the  laws  that  protect  the  owner 
against  trespass. 

The  protection  of  ownership  which  the  owner  of  a  thing 
has  a  right  to  chum,  like  that  of  all  otlicr  rights,  is  funiishod 
by  the  trilninals  of  law  and  the  social  forces  back  of  them.    It 


24  FUNDAJVIENTAL  CONCEPTS  [22 

would,  however,  be  practically  impossible  for  a  court  of  law 
to  keep  track  of  what  a  man  produces  or  earns,  or  what  he 
buj's  or  otherwise  acquires.  Certain  rules  have  therefore  been 
adopted  to  determine  the  property  rights  of  individuals  in 
case  of  dispute.  According  to  these  rules,  possession  is 
accepted  as  proof  of  ownership  until  convincing  evidence  to 
the  contrary  is  presented.  This  principle  is  tersely  expressed 
by  the  saying  that  ''possession  is  nine  points  of  the  law." 

22.  The  State  and  Its  Function. — Some  power  capable  of 
protecting  the  weak  against  the  strong  is  manifestly  requisite 
for  the  maintenance  of  rights,  and  this  power  is  exercised  by 
the  organization  constituting  the  "state"  or  "government." 
Rights  can  evidently  rest  secure  only  when  there  is  a  power  in 
control  whose  authority  is  paramount. 

That  statutory  laws  are  the  formulation  of  mutual  agree- 
ments of  the  members  of  the  community  is  sometimes  ques- 
tioned. Most  laws  have  indeed  been  made  before  our  time 
and  we  have  had  no  choice  but  to  submit  to  them.  Even  those 
laws  that  are  made  in  our  day  are  not  made  directly  by  the 
people;  they  are  either  dictated  by  autocrats  or  enacted  by 
representatives  elected  for  that  purpose.  Those  who  are 
opposed  to  any  existing  law,  whether  it  has  come  do\\Ti  from 
our  ancestors  or  has  been  enacted  by  contemporary  lawmakers, 
are  certainly  not  willing  participants  in  the  agreement.  But 
we  must  consider,  in  view  of  the  constantly  changing  composi- 
tion of  the  body  politic  through  the  accretion  of  new  members 
and  the  dropping  out  of  old  ones,  that  mutual  agreements 
among  its  members  can  stand  only  on  condition  that  all  those 
who  are  included  in  the  membership  shall  acquiesce.  The  only 
alternative  would  be  to  rescind  all  law  and  proceed  without 
government.  Experience,  however,  has  demonstrated  that 
among  men,  constituted  as  they  are,  such  a  state  of  things  is 
impracticable.  We  have  therefore  no  choice  but  to  adhere  to 
the  rule  that  all  inhabitants  of  a  country  respect  its  statutes. 
These  must  be  enforced,  even  though  the  offender  be  not  a 
citizen. 

Jiaws  should,  of  course,  be  of  such  a  nature  that  no  reason- 
able objection  can  be  made  to  them.    If  there  are  laws  which 


22]  THE  SOCIAL  COMPACT  26 

do  not  come  under  this  rule,  they  may  be  changed  or  repealed, 
and  invasive  conduct  not  already  forbidden  can  be  forbidden 
by  new  laws.  It  is  true  that  even  under  representative  govern- 
ment this  cannot  be  accomplished  by  a  minority,  but  if  a 
valid  objection  to  existing  laws,  or  the  desirability  of  new  ones, 
can  be  clearly  demonstrated,  the  majority  will  gradually  be- 
come convinced  of  this  defect  in  the  statutes,  and  legislative 
reform  along  this  line  becomes  merely  a  question  of  time. 

Attempts  to  eiTect  such  changes  by  violent  means,  as  by 
revolutions,  have  generally  led  to  irrational  extremes,  and 
the  consequent  reaction  has  restored  the  old  regime  with  per- 
haps a  few  concessions.  When  reforms  are  desirable,  changes 
in  law  should  be  constructive,  not  destructive ;  in  other  words, 
faulty  laws  should  be  amended  and  rectified  rather  than  re- 
pealed, where  repeal  would  leave  the  community  without  judi- 
cial power  to  enforce  some  necessary  regulation. 

Among  the  attempts  to  formulate  rules  for  the  guidance  of 
law  makers,  the  work  of  Herbert  Spencer  occupies  a  prominent 
position.    According  to  his  law  of  equal  freedom: 

Every  man  has  freedom  to  do  all  that  he  wills,  provided  he  in- 
fringes not  the  equal  freedom  of  any  other  man.^ 

This  maxim  is  perhaps  more  accurately  stated  as  follows. 
Every  man  should  have  freedom  to  do  as-  he  wills,  provided 
he  infringes  not  the  equal  freedom  of  any  other  man.  In 
other  words,  laws  should  interfere  only  with  those  acts  of  men 
wliich  clearly  constitute  a  breach  of  equal  freedom  or  an 
invasion  of  the  rights  of  others.  But  even  this  rule  is  not  a 
definite  guide,  because  opinion  may  differ  as  to  what  con- 
stitutes an  infringement  of  equal  freedom.  There  are  acts 
which  are  considered  invasive  by  some  men  and  not  by  others. 
The  boycott  is  an  illustration.  When  such  disagreement  pre- 
vails, Spencer's  rule  fails.  But  it  goes  without  saying  that 
inequitable  laws  cannot  l)e  in  accord  with  equal  freedom. 
It  is  therefore  a  good  rule  to  make  eiiuily  the  test  in  deciding 
whether  any  given  law  should  stand  or  fall. 

"Spencer,  p.  121.     fcjee  list  of  authors  quoted. 


CHAPTER  IV 
VALUE 

23.  Significance  of  the  Term. — A  thing  has  "value"  if 
men  are  willing  to  give  other  things  in  exchange  for  it,  and 
the  more  of  these  other  things  it  can  command  the  greater  is 
its  value. 

The  quantity  of  goods  involved  in  an  exchange  is  deter- 
mined by  what  virtually  amounts  to  an  agreement  between  the 
parties  thereto,  and  the  rate  of  exchange  i*uling  in  each  agree- 
ment is  more  or  less  influenced  by  the  rate  at  which  similar 
exchanges  have  been  made  before. 

Value  is  almost  universally  considered  to  designate  an 
attribute  of  exchangeable  goods,  but  this  is  true  only  in  a 
qualified  sense.  When  used  in  its  indefinite  sense,  the  term 
is  descriptive  of  the  power  of  goods  to  command  other  goods 
in  exchange,  and  this  power  is  not  alone  dependent  on  the 
qualities  inherent  in  the  objects  of  exchange,  but  likewise  on 
external  circumstances.  Thus  an  improvement  in  the  ways 
of  making  an  article,  or  even  a  change  in  fashion,  may  cheapen 
it,  although  its  actual  qualities  remain  the  same.  There  is, 
however,  no  objection  to  regard  value  as  an  attribute  of  things 
which,  in  part,  depends  on  external  conditions,  just  as  weight 
is  a  quality  of  matter  depending  on  the  proximity  of  the  earth, 
toward  which  bodies  gravitate. 

24.  Distinction  between  Value  and  Utility. — In  trying 
to  grasp  the  meaning  of  "value,"  one  immediately  thinks  of 
"utility,"  which  signifies  the  capability  of  things  to  satisfy 
men's  needs  or  desires  (6).  But  though  value  and  utility 
are  closely  related,  they  are  not  identical.  For  example,  air 
is  absolutely  indispensable  to  us,  but  nevertheless  has  no  value, 
because  it  is  freely  accessible  to  all,  and  no  conscious  effort 
is  necessary  to  obtain  a  supply  that  suffices  to  sustain  life. 
Earlier  writers  have  emphasized  this  distinction  by  the 
26 


«5]  VALUE  27 

phrases  "value  in  use"  aud  "value  in  exchange,"'*  but 
"utility"  is  now  universally  employed  in  the  sense  of  "value 
in  use, ' '  and  the  term  ' '  value ' '  confined  to  the  idea  of  ' '  value 
in  exchange  "  or  "  market  value. ' ' 

Nevertheless,  confusion  of  the  two  tei-ms,  value  and  utility, 
is  frequently  met  with.  Thus  the  statement  that  "iron  is 
more  valuable  than  gold"  is  often  made,  when,  evidently, 
useful  is  meant.  Bishop  Whately  confounded  utility  and  value 
when  he  wrote  that  ' '  Pearls  are  not  valuable  because  men  dive 
for  them,  but  men  dive  for  them  because  they  are  valuable." 
The  correct  statement  would  seem  to  be :  Men  dive  for  pearls 
because  they  are  useful,  and  being  useful,  they  possess  value 
because  they  cannot  be  obtained  without  the  effort  of  the  diver. 

25.  Definition  of  Value. — It  will  be  observed  that  the  term 
"value,"  even  if  used  only  in  the  sense  of  exchange  value,  is 
really  applied  in  two  ways,  the  indefinite  and  the  definite,  as 
may  be  illustrated  by  the  statements:  "This  tiling  possesses 
value"  and  "The  value  of  this  thing  is  two  dollars."  This  is 
analogous  to  the  established  use  of  such  words  as  length  and 
weight.  When  we  say  that  weight  is  a  property  of  matter,  we 
allude  to  the  tendency  of  bodies  to  fall,  but  when  we  say  that 
the  weight  of  a  body  is  two  pounds,  we  compare  its  downward 
tendency  with  that  of  a  standard  pound.  In  the  one  sense  the 
word  designates  a  quality,  in  the  other  a  concrete  quantity. 

The  statement  that  a  thing  has  value  may  be  interpreted 
that,  if  it  is  offered  for  sale,  purchasers  will  be  found  willing 
to  give  something  else  in  exchange  for  it.  Value,  in  the 
indefinite  sense,  then,  is  that  attribute  of  things  which  prompts 
men  to  make  sacrifice  to  gain  possession  of  them  (40).  The 
term  is  synonymous  with  ' '  exchangeability. ' ' 

The  statement  that  the  value  of  a  thing  is  two  dollars 
informs  us  that  in  tlic  market  the  specified  thing  and  two  dol- 
lars will  be  given  one  for  the  other.  The  exchange  shows  that 
the  thing  and  two  dollars  are  equally  effective  in  the  market. 
When  applied  in  its  flefinite  sense,  the  tenn  value  denotes  the 
exchange  equality  of  two  enumerated  quantities.    We  might, 

*Cf.  Smith,  p.  21. 


28  FUNDAMENTAL  CONCEPTS  [25 

accordingly,  say:  "  This  thing  is  economically  equal  to  two 
dollars,"  or  "The  economic  equivalent  of  this  thing  is  two 
dollars."  Value,  then,  in  its  definite  sense,  is  synonymous 
with  equivalent.  For  the  phrase  "the  value  of"  we  may  sub- 
stitute "that  which  is  equal  to"  or  "that  which  can  be  obtained 
for." 

This  agrees  with  the  use  of  the  tei-m  in  mathematics.  The 
mathematician  finds  the  value  of  the  unknown  quantity  of 
an  equation,  or  inserts  numerical  values  for  the  literal  terms 
of  a  formula.  In  the  equation,  A  =  2,  the  number  2  is  the 
value  of  A. 

One  of  the  definitions  given  by  MacLeod  is  as  follows : 

The  value  of  any  economic  quantity  is  any  other  economic  quant itj' 
for  which  it  can  be  exchanged.' 

This  fully  covers  the  case. 

It  is  often  said  that  value  means  exchange  ratio.  This, 
however,  is  an  erroneous  conception.  Substituting  the  defini- 
tion of  a  word  for  the  word  itself  should  make  a  statement 
more  clear.  But  to  say  that  * '  the  exchange  ratio  of  a  thing  is 
two  dollars"  would  be  without  sense. 

It  is  a  fundamental  principle  in  mathematics  that  a  con- 
crete numerical  quantitj*  is  the  product  of  two  factors,  the 
niunber  or  ratio  and  the  denominator  or  unit.  In  the  state- 
ment that  the  value  of  a  thing  is  two  dollars,  "two"  is  the 
ratio  that  exists  between  the  value  of  the  thing  and  that  of 
one  dollar.  The  thing  is  worth  twice  as  much  as  a  dollar.  But 
while,  indeed,  the  number  "two"  expresses  a  ratio,  the 
phrase  "two  dollars"  is  no  more  a  ratio  than  is  the  phrase 
' '  two  yards. ' '  The  word  ' '  two ' '  and  the  phrase  ' '  two  dollars ' ' 
cannot  be  substituted  for  one  another.  It  would  be  meaning- 
less to  say  that  the  value  of  this  thing  is  two.  Nor  has  anyone 
ever  propounded  the  doctrine  that  weight  and  length  are 
ratios,  although  in  the  statement,  "The  length  of  this  rod  is 
two  yards, ' '  the  number  ' '  two ' '  expresses  the  ratio  that  exists 
between  the  length  of  the  rod  and  that  of  a  yardstick. 

*  MacLeod,  I,  p.  223. 


26.  27]  VALUE  '29 

Some  economists  take  pains  to  warn  their  readers  that 
"value"  is  not  a  thing.  This  is  perfectly  true  when  used  in 
its  indefinite  sense.  But  when  used  in  its  definite  meaning, 
that  is,  when  the  value  of  a  thing  is  spoken  of,  this  value  is 
some  other  thing,  say  a  certain  amount  of  gold.  The  value, 
the  equivalent,  of  an  abstract  quantity  can  only  be  another 
abstract  quantity.  But  the  value  of  a  concrete  quantity  must, 
in  the  nature  of  things,  be  another  concrete  quantity. 

26.  Market  Value. — A  thing  can  have  a  definite  value  or 
exchange  equivalent  only  while  it  is  being  exchanged.  Ex- 
change is  the  sole  criterion  of  value.  But  on  the  basis  of  past 
experience,  more  or  less  completely  recorded,  the  present  value 
of  a  thing  may  be  estimated,  and  since  exchanges  of  a  like  kind 
are  generally  made  at  a  more  or  less  unifoi-m  rate,  a  market 
value  may  be  assigned  to  staple  articles,  and  this  market  value 
is  that  which  we  have  in  mind  when  we  speak  of  stability  or  of 
fluctuation  of  values,  according  as  consecutive  exchanges  are 
effected  at  a  constant  or  at  a  varying  rate.  The  study  of  the 
law  of  value,  accordingly,  embraces  an  investigation  of  the 
causes  that  govern  the  course  of  exchange  rates.  The  value  of 
some  painting  of  an  old  master,  or  of  some  relic  of  antiquity, 
is  of  but  little  importance  in  the  present  inquiry.  A  law  of 
value  can  be  of  practical  use  to  the  student  of  economics  only 
by  its  application  to  the  study  of  the  distribution  of  the  wealth 
created  by  industry. 

27.  How  Values  Are  Measured. — Comparisons  can  be 
made  between  things  only  with  regard  to  such  (lualities  as  may 
be  possessed  in  common  by  both  objects  that  are  being  com- 
pared. Length  may  be  compared  with  length,  weight  with 
weight,  bulk  with  bulk.  The  economic  comparison  of  things 
must  accordingly  })e  based  on  a  common  (juality.  Each  of  the 
things  compared  must  possess  exchangeability,  or  capacity  for 
meeting  a  desire  for  its  possession.  Economic  equivalence  does 
not,  however,  imply  physical  similarity.  Just  as  two  objects 
may  be  equal  in  weight,  although  different  in  foinn,  size  and 
substance,  so  can  two  objects  bo  economically  eqnal,  that  is  to 
say,  evenly  exchangeable,  although  thoy  are  dissimilar  in 
every  other  respect.    Geometric  quantities  are  determined  by 


30  FUNDAMENTAL  CONCEITS  [28 

the  process  of  mensuration:  physical  properties,  such  as 
weight,  strength,  elasticity,  are  measured  by  appropriate  physi- 
cal tests ;  and  in  order  to  measure  the  value  of  a  thing,  we  hring 
it  to  market  and  observe  its  exchangeability . 

Economic  measurements,  when  contrasted  with  physical 
measurements,  possess  one  distinguishing  feature.  While  in 
mensuration,  in  mechanics,  and  in  other  like  branches  the 
process  of  measuring  quantities  consists  in  comparing  length 
with  length,  weight  with  weight,  and  so  forth,  the  process  of 
measuring  value  consists  in  the  substitution  of  each  of  the  two 
objects  of  exchange  for  the  other.  It  is  therefore  proper  to 
regard  each  of  these  objects  as  the  economic  equivalent — the 
value — of  the  other  at  the  moment  of  exchange. 

28.  The  Unit  of  Value. — Although  the  value  of  any  thing 
may  be  expressed  in  as  many  different  denominations  as  there 
are  other  things  for  which  it  may  be  exchanged,  it  is  currently 
expressed  in  terms  of  a  particular  commodity  selected  by  con- 
vention, a  definite  quantity  of  which  serves  as  the  unit  of  value. 
The  value  of  a  coat  may  be  twenty  bushels  of  wheat,  or  a  hun- 
dred pounds  of  meat,  or  five  hundred  grains  of  gold,  but  accord- 
ing to  local  usage  its  value  is  generally  rendered  in  terms  of 
"dollars"  or  other  value  units,  which,  as  we  shall  presently 
see,  generally  means  in  terms  of  gold.  The  advantage  of  using 
a  conventional  unit  is  so  obvious  that  even  in  the  earlier  stages 
of  civilization  this  method  of  expressing  values  was  in  use. 
It  is  true  that  the  selected  commodity  was  not  always  gold. 
Within  historic  times  such  things  as  oxen,  rice,  tobacco,  fur 
skins  and  silver  have  served  the  purpose.  But  in  the  course  of 
time  the  metals  gold  and  silver  have  proved  their  superiority 
for  this  use,  and  while  in  the  earlier  stages  of  commercial 
development  silver  was  chosen  as  the  criterion  of  market  values, 
gold  has  supplanted  it  during  the  past  century  in  most  civilized 
countries.  In  different  countries  different  quantities  of  the 
selected  metal  are  adopted  as  the  units,  known  by  their  respec- 
tive denominations,  such  as  dollar,  pound,  mark,  franc,  florin, 
peso,  and  so  forth.  The  present  American  unit  is  the  dollar, 
consisting  of  25.8  grains  of  gold  ^/^o  fine,  or  23.22  grains  of 
pure  gold. 


29. 30]  VALUE  SI 

29.  Price. — When  things  are  offered  for  sale,  the  rate  at 
which  the  merchant  is  ready  to  sell  them  is  given  in  terms  of 
the  conventional  unit,  and  the  word  "price"  is  used  in  place 
of  "value."  Price,  then,  expresses  the  value  of  a  unit  quan- 
tity of  the  goods,  stated  in  terms  of  the  adopted  value  unit. 

It  is  self-evident  that  the  price  of  the  commodity  selected 
for  the  unit  of  value  will  remain  stable.  By  reason  of  this 
absence  of  fluctuation  in  price  the  metal  selected  is  known  as 
the  "standard  commodity."  Care  must,  however,  be  taken 
to  guard  against  a  misapprehension.  It  is  only  the  price  of  the 
standard  commodity  that  remains  fixed,  not  its  value  as  com- 
pared with  other  things. 

In  the  following  pages  the  dollar  is  taken  as  the  unit  of  value 
and  gold  as  the  standard  commodity.  This  is,  however,  not  to 
be  understood  as  precluding  the  use  of  other  units  of  value  or 
standard  commodities. 

It  would  seem  that  these  few  words  should  conclude  the 
discussion  of  this  subject.  But  for  some  reason  there  exists 
a  diversity  of  opinion  not  warranted  by  the  simplicity  of  the 
case.  Voluminous  controversies  have  wrought  needless  con- 
fusion and  have  ol)scured  a  really  simple  problem.  A  brief 
review  of  some  of  the  proposed  methods  for  measuring  values, 
and  a  statement  of  the  objections  to  which  they  are  open,  is 
here  in  place. 

30.  Labor  as  a  Measure  of  Value. — That  labor  is  a  factor 
in  the  creation  of  value  has  been  i*eeognized  by  ear-ly  writers 
on  economics  who  inferred  from  this  that  labor  is  the  natural 
yardstick  of  value  (63a,  149).    Adam  Smith  asserts  that: 

Labour  is  the  real  measure  of  the  e.xchangeable  value  of  all  com- 
modities." 

Were  it  possible  to  define  a  unit  of  labor  so  that  any  one 
unit  would  have  the  same  value  as  every  other  unit,  this  wouhl 
perhaps  be  the  most  satisfactory  measure  of  value.  But  the 
value  of  labor  lies  in  its  productivity,  and  productivity  is  not 
in  proportion  either  to  the  duration  of  labor  or  to  the  amount 
of  physical  exertion.     There  are  great  differencos  in  amount 

"Smith,  p.  22. 


32  FUND-\^IEXT.\L  CONXEPTS  [so 

and  quality  of  things  produced  in  equal  time  by  different  men 
employed  on  the  same  kind  of  work,  and  there  are  still  greater 
differences  where  the  kind  of  labor  diff'ei-s.  TVe  can  obtain  a 
conception  of  the  value  of  labor  only  by  its  fruit.  Until  we 
learn  what  the  values  of  the  different  products  of  labor  are, 
we  have  no  means  of  judging  the  value  of  the  different  kinds 
of  labor  that  create  them.  And  if  products  alone  can  measure 
the  value  of  labor,  labor  cannot  conversely  gauge  products. 
Hence  it  is  impossible  to  adopt  labor  as  a  standard  with  which 
to  measure  the  value  of  things  (164). 

If  there  were  no  difference  in  the  value  of  different  kinds 
of  labor,  and  if  the  productivity  of  all  men  engaged  in  the 
same  kind  of  work  were  equal,  the  labor-hour  might  very  well 
be  used  as  a  unit.  This  may  occasionally  be  done  for  the  sake 
of  argument,  but  always  with  the  reservation  that  all  men 
are  supposed  to  be  equally  efficient  (32,  199). 

Ricardo  follows  in  the  footsteps  of  Smith  when  he  says 
(62): 

The  exchangeable  value  of  all  commodities,  whether  they  be  manu- 
factured, or  the  produce  of  the  mines,  or  the  produce  of  land,  is  always 
regulated,  not  by  the  less  quantity  of  labour  that  will  suffice  for  their 
production  tinder  circumstances  highly  favourable,  and  exclusively  en- 
joyed by  those  who  have  peculiar  facilities  of  production;  but  by  the 
greater  quantity  of  labour  necessarily  bestowed  on  their  production  by 
those  who  have  no  such  facilities;  by  those  who  continue  to  produce 
them  under  the  most  unfavourable  circumstances;  meaning — by  the 
most  unfavourable  circumstances,  the  most  unfavourable  under  which 
the  quantity  of  produce  required,  renders  it  necessary  to  carry  on  the 
production.' 

This  proposition  is  defective  in  so  far  as  the  expression 
"quantity  of  labour''  lacks  a  definite  meaning.  The  "ex- 
changeable value"  of  a  commodity  can  be  expressed  in  terms 
of  some  other  commodity,  like  gold  or  silver,  but  not  in  terms 
of  labor.  However,  if  in  Ricardo 's  proposition  "cost  of 
labor"  or  "cost  of  production,"  properly  defined  and  qualified 
(61),  is  substituted  for  "labour."  it  becomes  a  correct,  though 
incomplete,  statement  of  the  law  of  value  (63&). 

^  Ricardo,  p.  37. 


31]  VALUE  SS 

Karl  Marx,  in  propounding  his  theory  of  vahie  as  a  basis 
of  his  scheme  of  socialism,  has  recourse  to  the  labor-hour  as 
a  measure  of  value.  His  error  in  this  respect  will  be  more  fully 
elucidated  in  Chapter  VIII. 

31.  Other  Value  Units. — "When  the  values  of  two  different 
things,  or  of  the  same  thing  at  different  times,  are  to  be  com- 
pared, these  values  must  be  expressed  in  terms  of  some  one 
value  denominator.  Nevertheless,  there  are  writers  who  dis- 
cuss the  subject  as  though  changes  of  value  can  be  conceived 
independent  of  any  stated  value  denominator.  Among  others, 
John  Stuart  Mill  asserts  that : 

All  commodities  may  rise  in  their  money  price.  But  there  cannot 
be  a  general  rise  of  values." 

This  statement  is  valid  only  if  a  certain  proportionate 
fraction  of  the  sum-total  of  all  existing  commodities  is  adopted 
as  the  unit  of  value.  The  siun-total  of  all  wealth,  unless  its 
quantity  be  changed,  will  then  have  a  fixed  and  invariable 
value.  Only  on  this  condition  is  it  true  that  a  rise  in  the  value 
of  one  thing  is  balanced  by  an  equal  fall  in  the  value  of  the 
sum  of  all  other  tilings,  so  that  neither  a  general  rise  nor  fall 
of  values  could  ensue. 

Other  economists,  recognizing  that  the  value  of  our  present 
unit  fluctuates  in  relation  to  all  other  things,  propose  an  "in- 
variable ' '  value  unit,  without,  however,  specifying  how  this  is 
to  be  established.  These  also,  no  doubt,  have  reference  to  a 
unit  consisting  of  the  sum-total  of  all  wealth,  or  to  a  propor- 
tionate part  thereof.  But  while  such  an  idealistic  unit  may 
very  well  be  adopted  in  hypothetical  examples  illustrating  an 
argument  (108,  119),  it  cannot  be  introduced  in  practice  for 
several  reasons. 

If  a  unit  consisting  of  a  proportionate  part  of  all  existing 
wealth  were  adopted,  it  could  not  long  remain  "invariable," 
in  the  sense  that  "there  cannot  be  a  general  rise  of  values," 
since  not  only  the  quantity,  but  also  the  composition  of  the 
wealth  in  existence,  is  constantly  subject  to  changes.  From 
time  to  time  new  kinds  of  commodities,  unknown  before,  appear 

'Mill,  1,  p.  540. 
3 


34  FUNDAMENTAL  CONCEPTS  [si 

upon  the  market.  It  follows  that  if  a  unit  corresponding  to 
the  composition  of  the  wealth  of  one  period  were  established, 
it  would  not  correspond  with  the  composition  of  the  wealth 
of  perhaps  a  decade  later.  A  periodical  revision  of  the  unit 
would  therefore  be  necessary  if  an  idealistic  measure  of  value 
were  to  be  maintained,  and  this  would  evidently  not  be  an 
invariable  unit. 

A  second  difficulty  would  be  met  in  the  attempt  to  define 
this  unit,  so  that  its  composition  might  be  on  record.  This 
would  require  the  listing  of  all  forms  of  wealth,  with  the  state- 
ment of  the  proper  amount  of  each,  as  they  are  to  figure  in  the 
unit,  and  this  is  manifestly  impossible.  Some  wi'iters,  recog- 
nizing this  difficulty,  have  proposed  a  composite  or  multiple 
unit  (321),  consisting  of  a  definite  number  of  staple  articles 
in  definite  quantities.  The  total  value  of  the  items  is  to  con- 
stitute a  standard  sum,  such  as  one  hundred  or  one  thousand 
dollars,  according  to  the  composition  of  the  list.  Of  course, 
by  this  expedient  only  an  approach  to  an  idealistic  unit  could 
be  attained. 

A  third  objection,  which  applies  to  composite  units  as  well 
as  to  the  supposed  idealistic  one,  arises  from  the  fact  that  most 
goods  are  produced  in  different  grades  of  quality  (Ilia).  A 
given  list  of  articles  composing  the  unit  would  be  an  unreliable 
guide,  even  though  an  attempt  be  made  strictly  to  specify  the 
quality  of  each  constituent,  and  the  unit  would  be  correspond- 
ingly indefinite.  The  case  is  different  with  gold  or  silver, 
the  quality  of  which  can  be  specified  with  absolute  accuracy 
and  tested  as  closely  as  it  is  possible  to  Aveigli  on  precision 
scales.  This  homogeneity  of  the  precious  metals  has  been 
the  principal  reason  for  their  adoption  as  standards.  A  unit 
composed  of  commodities  of  more  variable  grades  might  give 
rise  to  frequent  disputes  as  to  the  proper  quality  and,  accord- 
ingly, the  proper  value  of  the  unit. 

The  fourth  objection  is  a  serious  stiunbling  block  to  the  use 
of  either  an  idealistic  or  a  multiple  standard.  There  is  no 
economic  force  by  which  the  market  value  of  things  generally 
can  become  related  to  a  prescribed  unit  of  this  kind.  The 
things  specified  in  any  arbitrary  list  would  be  neither  offered 


32J  VALUE  35 

nor  demanded  in  that  particular  combination,  and  in  the 
absence  of  the  "standard  commodity"  as  an  article  of  mer- 
chandise, its  exchange  ratio  with  any  one  commodity  would 
never  become  manifest  in  the  market.  The  sum  of  the  market 
values  of  all  the  articles  specified  in  the  list  is  supposed  to 
remain  unchanged,  however  each  item  may  change  in  price; 
but  if  the  movement  of  market  values  should  at  any  time  be 
such  that  this  sum  is  changed,  there  is  no  way  in  which  this 
condition  could  automatically  react  upon  prices  generally  so 
as  to  restore  the  original  siun.  For  gold  as  well  as  for  silver 
there  is  a  constant  demand,  so  that  the  exchange  ratio  of  either 
of  these  metals  with  other  things  is  determined  daily  (54). 

There  is  still  a  fifth  objection,  namely,  the  difficulty  of 
making  the  value  of  money  conform  to  a  given  composite  unit, 
but  discussion  on  this  point  must  be  reserved  for  a  later 
occasion  (1116). 

32.  Expediency  of  a  Composite  Unit. — Even  if  these  diffi- 
culties could  be  surmounted,  it  would  still  be  a  question  whether 
much  could  be  gained  by  the  introduction  of  a  composite 
unit.  So  long  as  the  unit  serves  merely  to  indicate  the  ex- 
change ratios  of  different  commodities,  or  to  compare  one 
amount  of  wealth  with  another  at  any  given  time,  it  would 
be  immaterial  whether  or  not  the  conventional  unit  is  subject 
to  slow  changes  as  compared  with  the  sum  of  all  other  things. 
Changes  in  the  value  denominator  can  work  injury  only  when 
a  debt,  expressed  in  dollars,  or  whatever  the  unit  may  be,  is 
incurred  at  one  time  and  paid  when  the  unit  has  changed  its 
value  with  regard  to  commodities  generally.  Let  us  examine, 
then,  what  injury  may  result  through  fluctuations  in  the  pur- 
chasing power  of  the  value  unit. 

Owing  to  the  fact  that  all  things  are  constantly  subject  to 
changes  in  value,  their  owners  must,  as  a  matter  of  course, 
assume  the  risk  of  such  changes.  If  a  uniform  change  were 
to  take  place  in  the  price  of  all  commodities,  the  relative  values 
of  all  forms  of  wealth,  excepting  the  standard  commodity,  gold, 
would  remain  unchanged,  and  nobody  would  either  lose  or  gain 
except  those  who  hold  gold  or  money  and  those  who  hold 
money  claims  or  owe  money  debts.    A  general  rise  in  prices 


36  FUNDAMENTAL  CONCEPTS  [38 

is  simply  an  indication  of  a  fall  in  the  value  of  gold  as  com- 
pared with  all  other  things,  and  vice  versa.  While  prices  in 
general  rise  or  fall,  the  creditors'  claims,  being  in  terms  of 
gold,  will  correspondingly  fall  or  rise  in  general  purchasing 
power,  but  the  holders  of  money  claims  will  lose  or  gain  no 
more  on  this  account  than  they  would  have  lost  or  gained  had 
they  not  loaned  the  money,  but  kept  it  in  their  possession  as 
such.  The  owners  of  other  forms  of  wealth  must  shoulder 
similar  risks  resulting  from  changes  in  the  value  of  their  hold- 
ings. Since  gold  is  the  commodity  whose  value  fluctuates  from 
natural  causes  probably  least  of  all,  the  importance  of  pro- 
tecting creditors  against  loss  from  these  slight  fluctuations  is 
less  pressing  than  is  often  claimed. 

To  the  advocates  of  the  labor  standard  of  value  the  com- 
posite standard  would  be  scarcely  more  acceptable  than  the 
gold  standard.  Let  us  consider,  for  the  sake  of  argument, 
the  case  of  a  twenty-year  bond  expressed  in  terms  of  a  mul- 
tiple standard,  and  assume  that  during  the  twenty  years  such 
progress  is  made  in  the  industries  that  the  effort  required  at 
the  beginning  of  the  term  to  produce  the  commodities  specified 
in  the  standard  list  will  at  the  end  be  reduced  to  one-half. 
Under  these  conditions  the  effort  of  one-half  of  one  day's  work 
of  the  borrower  (30)  would  pay  a  debt  representing  a  whole 
day's  work  of  the  lender. 

While  the  gold  denominator  is  not  altogether  free  from 
objection,  no  available  substitute  appears  to  be  preferable. 

33.  The  Theory  of  Value. — As  has  been  said  before,  the 
value  of  things  is  ascertained  from  the  rates  at  which  they 
are  exchanged.  These  rates  are  not  a  matter  of  accident,  but 
are  determined  by  certain  existing  conditions.  The  study  of 
these  conditions  constitutes  the  most  important  problem  of 
economics,  since  upon  the  process  of  exchange  depends  the 
distribution  of  wealth. 

At  first  glance  the  problem  appears  to  present  little  diffi- 
culty. It  would  seem  that  the  ratio  at  which  any  two  com- 
modities are  exchanged  is  simply  an  expression  of  the  relative 
estimation  in  which  these  commodities  are  held  by  the  parties 
to  the  exchange.     But  on  further  investigation  it  becomes 


34]  VALUE  37 

apparent  that  the  problem  is  not  quite  so  simple.  In  the  society 
of  to-day,  composed  of  men  and  women  of  the  most  variant 
tastes  and  desires,  of  the  most  divergent  abilities  and  disposi- 
tions, surrounded  by  the  most  unequal  environments  and 
opportunities,  the  estimations  of  any  one  thing  by  different 
persons  are  very  far  from  equal.  Even  in  the  case  of  food, 
the  most  important  product  of  labor,  tastes  differ  widely ;  and 
yet  more  striking  differences  can  be  observed  in  the  varying 
desires  for  luxuries.  "While  the  appreciation  of  works  of  art 
is  highly  developed  in  some  persons,  it  is  more  or  less  lacking 
or  even  totally  absent  in  others.  The  craving  for  alcoholic 
drink  or  for  tobacco  becomes  irresistible  to  those  who  use 
either  habitually,  while  to  others  these  things  are  repugnant. 
Nevertheless,  as  a  rule,  and  especially  for  the  great  staples  of 
production,  there  is  but  one  market  price  for  all  comers.  The 
prices  of  things  are  regulated  in  some  way  by  the  judgment  or 
estimation  of  all  buyers  and  sellers  combined.  The  question 
before  us  is :  How  do  these  various  evaluations  in  their  com- 
bination determine  the  price  of  each  commodity  ? 

34.  Supply  and  Demand  Defined. — The  adjustment  of 
values  in  the  market  is  generally  attributed  to  the  interaction 
of  supply  and  demand.  In  order  to  discuss  the  subject  intelli- 
gently it  is  necessary  that  we  arrive  at  a  clear  understanding 
of  what  these  terms  really  mean. 

"When  we  speak  of  supply  and  demand,  it  is  with  special 
reference  to  some  particular  kind  of  things  or  services,  and  in 
that  sense  supply  denotes  quantity  offered  for  exchange.  Hence 
supply  involves  an  equal  demand  for  other  things,  generally 
a  demand  for  money  through  which  those  other  things  are 
obtainable. 

Demand  is  to  be  understood  as  effective  demand,  that  is  to 
say,  not  merely  a  desire  for  things,  but  a  desire  accompanied  by 
the  ability  and  readiness  to  give  an  equivalent  in  return,  gener- 
ally in  the  form  of  money.  Therefore,  every  demand  involves 
an  equal  supply,  just  as  every  supply  involves  an  equal  demand 
(269). 

From  this  it  follows  that  the  total  supply  of  all  things 
and  services  in  a  market  always  (Hjuals  in  value  the  total  effec- 


38  FUNDAMENTAL  CONCEPTS  [35.  36 

tive  demand  for  all  things  and  services.  It  is  to  be  noted,  how- 
ever, that  this  equality  has  reference  only  to  the  total  market, 
but  not  to  any  particular  commodity.  When  we  come  to  con- 
sider some  one  commodity,  it  will  be  found  that  a  disparity 
between  supply  and  demand  is  not  only  possible,  but  is  of  fre- 
quent occurrence. 

"While  by  far  the  greatest  number  of  exchanges  are  now 
effected  through  money,  we  should  always  bear  in  mind  that 
money  is  in  reality  nothing  more  than  a  medium  for  exchang- 
ing one  kind  of  goods  for  another  kind,  and  that,  after  all,  the 
fundamental  form  of  exchange  is  barter.  Every  buyer  is 
necessarily  a  seller  of  that  which  he  gives  in  payment,  and 
every  seller  is  a  buyer  of  that  which  he  receives  in  pay- 
ment (51). 

35.  Subjective  Valuation. — The  analysis  of  the  process 
by  which  the  value  of  commodities  is  regulated  is,  for  obvious 
reasons,  to  be  divided  into  three  stages.  The  first  step  will  be 
a  study  of  the  relation  of  the  individual  to  the  goods  he  pro- 
duces and  consumes,  in  short,  of  the  conditions  on  which  indi- 
vidual estimation  depends.  This  will  be  followed  by  an  ex- 
amination of  how  the  respective  estimations  determine  the 
exchange  rate  in  barter  between  two  individuals.  We  shall 
then  be  prepared  for  the  final  step — the  deduction  of  the 
law  of  supply  and  demand,  which  rules  the  exchange  rate 
among  any  number  of  individuals. 

Although  values  and  prices  can  be  expressed  only  in  terms 
of  something  objective,  they  depend,  in  the  last  analysis,  on 
human  desires  and  aversions  which  are  of  a  purely  subjective 
nature.  Production  and  exchange  are  really  governed  by  the 
actions  and  reactions  of  these  impulses,  and  it  remains  for  us 
to  find  how  the  gap  between  the  subjective  and  the  objective 
is  bridged. 

Production  is  regulated  by  two  forces,  the  one  impelling, 
the  other  restraining,  and  it  is  the  interaction  of  these  forces 
that  determines  subjective  valuation. 

36.  Desire  the  Impelling  Force. — Things  which  have  a 
capacity  for  satisfying  human  wants  are  for  that  reason  de- 


37. 38]  VALUE  39 

sired  by  human  beings.  Under  the  impulse  of  such  desire, 
men  labor  and  strive  to  gain  possession  of  the  things  that 
satisfy  wants.  After  an  individual  want  is  satisfied  the  desire 
ceases  to  be  an  active  impulse,  but  it  remains  in  a  passive  form 
which  becomes  active  again  with  the  passing  of  the  gratification. 

"Whenever  some  want  is  only  partially  satisfied,  there  re- 
mains a  desire  of  some  degree  still  in  force  as  an  impulse  to 
action. 

Experience  having  taught  that  the  gratification  of  a  desire 
wears  away,  and  that  the  want  will  recur  with  more  or  less 
certainty  in  the  future,  men  are  impelled  to  produce  and 
accumulate,  for  future  use,  stores  of  things  they  want.  Things 
that  can  be  produced  but  seasonally  are  accumulated  in  quan- 
tities that  will  cover  needs  until  the  next  season,  but  of  the 
things  that  can  be  produced  from  day  to  day,  only  enough  to 
suffice  the  passing  need  will  be  secured,  unless  there  is  some 
reason  for  acquiring  more. 

Since  an  insufficient  store  of  needful  things  will  permit 
but  a  partial  gratification  of  the  desire  for  them,  the  impulse 
to  further  acquisition  is  the  greater  the  more  inadequate  the 
store. 

37.  Limitation  of  Demand. — The  converse  is  equally  true. 
A  housewife,  finding  two  loaves  a  day  ample  for  her  family, 
would  not  buy  three  loaves  per  day,  even  though  the  baker 
offered  the  additional  loaf  at  a  reduced  price.  She  has  no 
need  for  the  third  loaf,  because  the  two  loaves  which  she  usually 
])uys  are  all  she  wants.  Of  course,  quantity  must  here  be  taken 
in  its  due  relation  to  time.  If  the  family  were  to  spend  the 
summer  in  the  country  where  the  baker  calls  but  twice  a  week, 
the  purchases  would  have  to  average  seven  loaves  at  each  call. 
Thus,  when  we  say  that  the  desire  to  add  to  any  given  store  is 
affected  by  the  possession  of  a  definite  quantity  of  that  store 
for  future  use,  we  must  keep  in  view  the  element  of  time  in 
that  connection  (60). 

38.  Bohm-Bawerk's  Illustration. — The  cause  of  the  de- 
sire being  less  when  the  store  is  greater  has  been  shown  by 
Biihm-Bawerk  to  be  due  to  the  diminishing  importance  of  the 
several  uses  to  which  a  thing  may  be  put.    lie  supposes  a  lone 


40  FUNDAMENTAL  CONCEPTS  [89 

colonist  who  has  just  harvested  five  sacks  of  grain  (39).  One 
sack  just  suffices  to  keep  him  from  starvation  until  the  crop  of 
the  following  year  becomes  available.  The  second  enables  him 
to  supplement  his  meals  so  as  to  remain  strong  and  healthy. 
With  the  third  he  purposes  to  feed  poultry  so  as  to  have  a 
variety  of  food.  The  fourth  he  reserves  for  making  liquor, 
and  for  the  fifth  he  knows  no  better  use  than  to  feed  it  to 
parrots  whose  antics  afford  him  amusement.  Here  are  enumer- 
ated five  uses  of  varying  importance.  Had  the  colonist  but  one 
sack,  he  would  value  it  very  highly,  as  his  very  existence  would 
depend  upon  it.  Were  he  in  possession  of  two,  his  desire  for 
more  grain  would  naturally  be  somewhat  less,  and  every  addi- 
tion would  reduce  his  desire  for  more  in  the  measure  in  which 
each  further  addition  would  be  of  less  importance  to  his 
existence. 

39.  Graphical  Representation  of  Utility. — The  principle 
here  illustrated  applies  practically  to  all  commodities.  Were 
a  man  limited  to  but  a  small  quantity  of  any  needful  thing, 
this  quantity  would  be  highly  prized,  as  it  would  suffice  only 
for  the  most  urgent  needs,  and  any  additional  supply  would 
be  prized  less,  inasmuch  as  it  could  only  be  used  to  satisfy 
less  important  needs  (56a).  The  estimates  thus  accorded  by  an 
individual  to  the  successive  elements  of  his  store,  as  they  would 
be  applicable  to  satisfy  his  desires  of  successively  diminishing 
importance,  may  be  graphically  represented  by  the  descending 
curve  DD',  Fig.  1,  the  successive  elements  being  laid  off  on  the 
horizontal  axis  of  abscissas,  while  the  vertical  ordinates  indi- 
cate the  intensity  of  the  individual's  desire  for  each  corre- 
sponding element  or  unit. 

This  curve  must,  of  course,  be  understood  as  representing, 
not  the  physical  capacity  of  the  one  commodity  under  consider- 
ation to  gratify  desires,  but  the  varying  degree  of  desire  for 
that  commodity  in  the  case  of  some  one  individual.  It  is  also 
to  be  observed  that  the  curve  DD'  represents  not  only  the  un- 
satisfied or  active,  but  also  the  satisfied  or  passive  desire  for 
the  commodity  in  question,  and  that  only  such  portion  of  the 
desire  which  is  not  covered  by  the  store  already  on  hand  will 
become  effective  as  a  desire  for  more.     Hence,  if  Og'  is  the 


40]  VALUE  41 

quantity  already  at  command,  the  desire  for  the  next  element 
to  be  acquired  would  be  equal  to  q'd'  or  Op  ;  or  if  the  quantity 
on  hand  should  equal  the  abscissa  Oq",  the  desire  for  further 
acquisition  would  be  represented  by  the  ordinate  q"d!'  or  Op" . 

In  the  illustration  of  the  colonist  (38)  the  store  of  grain 
was  adapted  for  at  least  four  different  uses,  each  of  which 
gratified  a  different  desire.  In  the  mind  of  the  colonist  these 
several  uses  presented  themselves,  according  to  their  impor- 
tance, in  descending  progression,  the  several  sacks  being  re- 
served, in  succession,  for  these  several  uses.  The  first  two 
served  for  plain  food  necessary  to  preserve  life  and  strength. 
The  desire  of  the  next  lower  importance  was  met  by  the  third 
sack,  as  it  provided  variety  in  the  fare.  The  fourth  and  fifth 
sacks  were  reserved  for  still  less  important  uses,  in  fact,  for 
luxuries. 

If  a  commodity  is  adapted  for  several  different  purposes, 
it  would  be  quite  feasible  to  show  in  the  diagram  as  many 
curves  as  there  are  independent  uses,  each  curve  representing 
the  desire  engendered  by  one  of  the  different  utilities.  But 
since  the  full  desire  for  a  thing  develops  from  a  sense  of  all 
of  its  various  utilities,  the  desire  in  its  totality  should  be  repre- 
sented by  a  single  curve.  This  curve  can  be  plotted  by  adding 
the  abscissas  of  equal  ordinates  of  all  the  curves  representing 
the  several  separate  utilities  (53,  566).  The  same  process  can 
be  applied  to  obtain  a  representation  of  the  total  desire  if  a 
new  use  is  found  for  a  thing.  Let  the  curve  EE'  of  Fig.  1 
denote  the  estimate  of  such  a  new  use,  then  its  geometric  addi- 
tion to  the  original  curve  DD'  will  result  in  the  new  curve 
DD",^  which  will  then  represent  the  total  desire  for  the  posses- 
sion of  the  thing  in  question. 

40.  The  Question  of  Quantity. — The  desire  of  an  individ- 
ual to  acquire  more  of  any  given  commodity  depending,  as  we 
have  seen,  on  the  amount  already  at  command,  and  on  the 
relation  which  his  desire  bears  to  his  store,  represented  by  the 
curve  DD',  Fig.  1,  this  curve  will  serve  to  indicate  the  intensity 

•The  compounding  of  the  two  curves  is  accomplislied  by  making, 
in  each  horizontal  Hcction,  tlic  Hpace  m'n'  equal  to  mn. 


42  FUNDAMENTAL  CONCEPTS  [41 

of  his  desire  for  more,  if  the  quantity  he  has  on  hand  is  given. 
Suppose  the  abscissa  Oq  to  represent  this  amount.  The  line 
q^d'  will  then  divide  the  desires  which  can  be  satisfied  from 
those  that  cannot,  and  the  ordinate  q'd'  measures  not  only  the 
last  of  the  desires  that  can  be  satisfied,  but  also  the  first  of 
those  desires  which  will  remain  unsatisfied,  and  this,  in  turn, 
measures  the  impulse  to  further  effort  toward  increasing  the 
store. 

This  impulse  manifests  itself  by  a  willingness  to  make 
some  sacrifice  in  order  to  obtain  the  things  desired,  either  by 
putting  forth  the  effort  to  make  them  or  by  offering  some 
product  of  effort  in  exchange  for  them  (25). 

We  have  now  traced  the  intensity  of  desire  to  two  factors, 
of  which  the  one  is  represented  by  the  curve  BD'  and  the  other 
is  the  quantity  at  command.  Of  these  the  first  is  a  character- 
istic of  the  individual  whose  desire  for  the  commodity  in  ques- 
tion is  represented,  and  this  must  be  accepted  as  a  fundamental 
factor.  The  other,  namely,  the  quantity  at  command,  may 
vary,  but  there  is  a  certain  quantity  which  he  will  accumulate 
under  normal  conditions.  What  is  it  that  delimits  this  quan- 
tity?   At  what  point  will  he  stop  accumulating? 

41.  Reluctance  the  Restraining  Force. — The  store  of  any 
given  commodity  that  an  individual  accumulates  is,  in  the 
nature  of  things,  limited,  and,  assuming  normal  conditions, 
the  cause  of  that  limitation  is  primarily  the  natural  unwilling- 
ness of  the  human  being  to  put  forth  the  necessary  effort  of 
production.  This  reluctance  is  a  restraining  force,  acting  in 
opposition  to  the  impelling  force  of  desire.  Production,  then, 
is  regulated  by  two  opposing  forces.  The  desire  engendered 
by  the  prospective  utility  of  any  given  product  is  the  in- 
centive, the  impelling  force  to  its  production,  while  the  diffi- 
culty or  strain  of  producing  it  is  the  reacting  or  restraining 
force. 

A  commodity  can  therefore  be  viewed  from  two  stand- 
points. To  the  consmner  it  represents  utility;  it  offers  the 
means  of  gratifying  some  desire.  To  the  producer,  on  the 
other  hand,  it  represents  a  certain  amount  of  effort  spent. 
The  desire  for  a  thing  and  the  effort  required  to  get  it  can 


42, 43]  VALUE  43 

be  compared  only  in  the  mind  of  one  and  the  same  person. 
Everyone  who  is  on  the  way  to  obtain  anything,  whether 
through  production  or  through  exchange,  contrasts  in  his 
own  mind  the  satisfaction  which  he  can  get  out  of  the  thing 
against  the  labor  or  sacrifice  necessary  to  get  it. 

42.  Graphical  Representation  of  Effort. — While  the  im- 
pulse to  obtain  any  thing  diyyiinishes  as  the  quantity  already 
at  command  is  increased,  the  reluctance  to  produce  more  of 
a  thing,  on  the  contrary,  increases  with  the  amount  already 
produced.  The  first  hours  of  a  day's  work  fatigue  the  aver- 
age workman  but  little.  But  as  the  day  wears  on,  the  labor 
becomes  more  and  more  irksome  to  him  and  often  less  effi- 
cient. The  amount  produced  in  the  first  hour  requires  less 
effort  than  that  produced  in  the  last,  and  the  strain,  as  con- 
ceived by  the  worker,  can  be  represented  graphically.  Tlie 
ascending  curve  88',  Fig.  2,  depicts  the  relation  of  the  amount 
already  produced  to  the  reactive  effect  of  the  strain  attending 
the  production  of  more. 

43.  The  Point  of  Equilibrium. — Every  producer  is  also  a 
consumer,  for  he  produces  for  the  purpose  of  having  things 
to  consume.  The  man  who  himself  consumes  that  which  he 
produces  naturally  views  his  products  from  both  standpoints. 
He  compares  the  gratification  they  will  yield,  or  the  enjoy- 
ment they  will  bring,  with  the  effort  and  strain  which  their 
production  requires.  This  is  also  true  of  him  who  acquires 
what  he  wants  in  exchange  for  that  which  he  produces,  with 
this  difference,  that  he  gauges  the  utility  of  his  efforts  by  the 
gratification  he  anticipates,  not  from  the  things  he  makes, 
but  from  the  things  he  obtains  in  exchange  for  what  he 
makes. 

The  two  opposing  forces  arising  from  desire  to  consume 
and  from  disinclination  to  exert  one's  self  are  instinctively 
felt  and  intuitively  weighed  by  the  individual.  By  combining 
in  one  diagram  (Fig.  2)  the  curves  DD'  and  88',  the  mental 
contest  between  his  desire  for  acquiring  things  and  his  re- 
luctance to  exert  himself  is  lucidly  portrayed.  It  is  clearly  to 
be  seen  at  what  point  the  opposing  forces  come  to  a  balance, 


44  FUNDAMENTAL  CONCEPTS  [43 

and  to  what  extent  the  individual  will  apply  himself  to  work, 
supposing  him  to  be  free  to  work  as  he  will. 

Suppose,  for  instance,  the  diagram  to  represent  the  ease 
of  a  merchant  tailor  who  can  complete  6  coats  a  week  if  he 
works  5  hours  a  day,  or  12  coats  if  he  extends  his  labor  to 
11  hours.  It  is  here  assumed  that  a  doubling  of  the  output 
requires  more  than  twice  the  time,  so  as  to  include,  even  in 
this  crude  illustration,  the  effect  of  increased  lassitude  and 
the  corresponding  decrease  of  efficiency  due  to  prolonged 
labor.  The  increasing  disinclination  to  continue  labor  is  repre- 
sented by  the  rise  of  the  curve  SS'.  We  may  now  assume  that 
Oq  represents  6  coats  per  week,  and  Oq"  represents  12  coats. 
By  working  only  5  hours  a  day,  the  worker  finds  that  q',  the 
last  increment  produced,  yields  to  him  the  gratification  q'd', 
which,  as  the  diagram  shows,  overbalances  his  disinclination 
q's'  to  continue  working.  The  impelling  force  exceeds  the 
restraining  force.  By  continuing  to  produce  the  next  follow- 
ing increments,  the  worker  would  obviously  gain  more  in  the 
form  of  gratification  than  he  would  expend  in  the  form  of 
effort,  and  he  will  naturally  extend  his  hours  of  labor.  But 
if  he  should  work  11  hours  per  day  to  complete  12  coats  per 
week,  represented  by  Oq",  he  would  find  that  in  producing 
the  last  increment,  namely,  q",  the  required  sacrifice  q"s" 
would  exceed  the  expected  gain  q"d".  The  restraint  would 
exceed  the  impelling  force.  He  will  therefore  intuitively 
choose  the  time  of  about  9  hours,  producing  the  quantity  Oq, 
namely,  10  coats  per  week,  since  the  sacrifice  of  producing 
the  last  increment  is  equal  to  the  benefit  he  can  derive  from 
it,  both  being  represented  by  qa. 

The  point  a,  where  the  two  curves  intersect,  locates  the 
last  increment  which,  under  the  given  circumstances,  will  be 
produced.  This  last  increment  is  the  one  at  which  the  desire 
for  possession  is  exactly  balanced  by  the  aversion  to  perform 
the  work  required  for  its  production.  With  the  increase  of 
the  time  of  daily  labor  the  restraining  force  gradually  in- 
creases, while  the  impelling  force  steadily  diminishes  until, 
at  this  point,  both  forces  are  equal.  So  long  as  the  desire 
for  possession,  as  q'd',  exceeds  the  dislike  for  work,  as  q's\  the 


44]  VALUE  45 

time  of  labor  will  be  prolonged.  Only  when  the  degree  of 
the  sacrifice,  the  strain,  becomes  equal  to  the  expected  gratifica- 
tion will  the  natural  limit  of  work  be  reached  (238). 

Of  course  this  result  obtains  only  when  the  producer  is  free 
to  choose  the  duration  of  his  labor.  When  this  is  precluded  by 
rules  of  employment,  the  time  of  labor  will  be  subject  to  those 
iniles.  But,  in  general,  these  rules  may  be  regarded  as  agreeing 
fairly  well  with  the  time  limit  which  the  average  workman 
would  choose  of  his  own  accord. 

The  objection  may  be  urged  against  these  diagrams  that,  as 
a  rule,  men  do  not  weigh  their  likes  and  dislikes  with  the 
nicety  here  assumed,  and  may  not  even  be  conscious  of  a 
graduated  mental  estimation  as  shown  by  the  curves.  Such  in- 
definiteness  of  inclination  might  be  indicated  in  the  diagram 
by  the  use  of  curved  bands  instead  of  curved  lines,  the  bands 
to  shade  off  from  centre  to  edge.  The  intersection  would  then 
be  a  field  with  a  somewhat  indefinite  margin,  analogous  to  our 
target  with  its  scattered  bullet  marks  (1). 

44.  Choice  as  Regards  Production. — Before  passing  from 
the  discussion  of  the  relation  of  the  individual  to  production 
and  consumption,  a  few  points  which  have  some  bearing  on  our 
later  investigation  may  profitably  be  taken  up.  Among  them  is 
the  question  as  to  what  determines  the  choice  of  occupation  of 
the  individual.  The  answer  to  this  question  differs  according 
to  the  degree  in  which  the  facility  of  exchanging  the  products 
of  effort  is  present. 

A  marooned  sailor,  for  example,  who  has  no  opportunity 
for  exchange  whatever,  first  attends  to  his  most  imperative 
needs.  He  seeks  first  for  fresh  water,  then  for  food,  then  for 
shelter.  After  any  one  of  these  needs  is  met,  it  is  eliminated 
from  his  endeavors,  and  the  one  of  next  lower  importance 
becomes  predominant.  During  the  first  few  days  he  can  give 
but  little  time  to  the  satisfaction  of  any  one  need  before 
another  claims  immediate  attention.  He  must  frequently 
change  the  direction  of  his  efforts  to  sustain  life.  Only  after 
providing  in  advance  for  immediate  n(^cossitios  can  he  afford 
to  keep  on  in  any  one  line  of  effort  and  thus  reduce  the;  loss  of 
time  and  energy  attending  every  change  of  work. 


46  FUNDAMENTAL  CONCEPTS  [45 

On  the  other  hand,  a  man  who  is  living  in  a  populous  com- 
munity and  who  finds  a  sufficient  demand  for  some  one 
product  to  enable  him  to  apply  himself  to  a  single  occupation 
naturally  chooses  that  one  which,  under  the  circumstances  and 
according  to  his  estimation,  yields  him  the  greatest  returns  for 
his  efforts  (61).  His  choice  depends  not  only  on  his  in- 
dividual capacity,  skill  and  inclination,  but  also  on  the  oppor- 
tunities offered  by  the  presence  of  natural  resources,  facilities 
of  transportation,  proximity  and  character  of  markets,  and  so 
forth. 

Most  men  are  able  to  take  up  more  than  one  kind  of  occu- 
pation, but  each  man's  aptitude  for  different  pursuits  varies 
more  or  less.  For  each  producer  there  is,  as  it  were,  an  occu- 
pation of  first,  another  of  second,  another  of  third  choice,  and 
so  forth  (149).  Some  men  are  capable  of  applying  themselves 
with  almost  equal  efficiency  in  more  than  one  direction.  To 
such  it  makes  comparatively  little  difference  which  of  these 
pursuits  they  follow,  and  a  slight  change  in  competitive  con- 
ditions may  cause  them  to  turn  from  one  occupation  to  another 
(223).  The  majority  of  workers,  however,  acquire  proficiency 
in  only  one  line.  This  is  not  always  due  to  neglect  or  to  in- 
ability to  learn  more  than  one  trade  or  profession,  but,  on  the 
contrary,  is  often  a  result  of  special  talent  or  of  exceptional 
opportunity.  To  such  a  change  of  their  occupation  would  be 
quite  disadvantageous. 

45.  Choice  as  Regards  Consumption. — When  a  man  goes 
into  the  market  to  buy  different  things  that  he  wants,  he 
apportions  his  means  to  the  several  purchases  in  accordance 
with  the  urgency  of  his  desire  for  each  thing.  The  mental 
process  by  which  he  reaches  a  decision  is  not  unlike  that  by 
which  the  marooned  sailor  determines  the  succession  of  his 
efforts.  Guided  by  past  experience,  he  divides  his  means  so 
that  the  quantities  of  his  several  purchases  will  satisfy  his 
corresponding  desires  to  such  a  degree  that  the  remaining 
wants  are  equal. 

The  case  may  be  illustrated  by  assuming  that  all  his  needs 
can  be  met  by  four  different  things.  Let  the  curves  DD' ,  EE', 
FF',  and  GO'  (Fig.  3)  represent  his  desires  for  these  things, 


46]  VALUE  47 

aud  let  the  line  1th'  represent  the  level  to  which  his  means 
enable  him  to  satisfy  his  wants.  The  quantities  of  his  pur- 
chases will  then  be  Oq,  Oq',  and  Oq",  respectively.  The  desires 
remaining  unsatisfied  are  then  measured  by  qd,  q'e,  and  q"f. 
It  will  be  noted  that  the  level  hh'  is  above  the  highest  point  of 
the  curve  GG',  which  would  indicate  that  under  the  given  cir- 
cumstances the  goods  represented  by  this  cun'e  are  beyond  his 
means.  Were  his  income  to  increase  so  that  he  could  more 
completely  satisfy  his  desires,  the  line  hh'  would  go  to  a  lower 
level  and  the  goods  G  would  be  brought  within  his  reach. 

46.  Advantages  of  the  Graphical  Method  of  Study. — The 
many  advantages  which  diagrammatic  representation  affords 
in  the  study  of  scientific  data  have  led  to  the  application  of  this 
method  in  many  fields  of  investigation.  Diagrams  not  only 
serve  to  represent  facts  in  a  perspicuous  manner,  but  also  to 
facilitate  the  analysis  of  various  subjects,  and  when  designed 
for  the  study  of  one  phase  of  a  problem,  they  are  often  found 
applicable  to  other  aspects  of  the  matter.  So  it  is  with  our 
diagram  (Fig.  2). 

Let  us  take  the  case  of  a  man  who  both  produces  and  con- 
sumes the  amount  Oq.  The  ordinates  of  the  successive  ele- 
ments of  the  ascending  curve  SS'  represent  the  increasing 
strain  of  the  effort  necessary  for  the  corresponding  increase 
of  production.  As  work  is  continued,  the  total  measure  of 
the  effort  expended  is  represented  in  the  diagram  by  the  area 
OqaS. 

Similarly,  his  evaluation  of  the  total  satisfaction  obtained 
from  consuming  his  earnings  is  represented  by  the  area  OqaD, 
and  the  net  satisfaction  derived  therefrom  eciuals  the  differ- 
ence of  these  two  areas,  which,  in  the  diagram,  is  represented 
by  the  three-sided  figure  ISaD.  We  thus  have  a  graphical 
representation  of  the  net  amount  of  satisfaction  exi)erien('e(l 
by  the  worker,  quantitatively  stated. 

Or  let  us  consider  the  case  of  a  man  who  i)r()(lu('es  more 
than  he  consumes,  saving  the  remainder  for  possible  emer- 
gencies. If  he  carries  on  production  to  the  point  q"  (Fig.  4), 
and  consumes  only  that  portion  of  it  n'i)ivs("ntr(|  by  Oq',  the 


48  FUNDAMENTAL  CONCEPTS  [47 

evaluation  of  his  total  effort  will  correspond  with  the  area 
0q"s"8,  and  that  of  his  total  satisfaction  with  the  area  Oq'd'D. 
Such  illustrations  might  be  further  multiplied,  but  the 
examples  given  are  a  sufficient  guide  for  other  possible  uses 
of  this  method  of  investigation. 

47.  Barter. — Our  next  step  is  to  analyze  the  process  by 
which  exchange  rates  in  simple  barter  are  determined.  This 
occurs  when  owners  of  different  things  come  to  an  agreement 
to  make  an  exchange.  Such  agreements  are  reached  after  a 
more  or  less  conscious  comparison,  by  both  parties,  of  the 
benefit  to  be  derived  from  the  thing  obtained  with  the  sacrifice 
involved  in  parting  with  the  thing  given. 

The  simplest  case  is  that  of  two  men,  removed  from  markets, 
who  wish  to  exchange  part  of  the  products  of  their  labor.  Sup- 
pose two  settlers,  one  having  cultivated  wheat,  the  other  wine, 
desire  to  make  an  exchange.  What  is  the  process  by  which  they 
come  to  an  understanding  regarding  the  rate  of  exchange? 

The  curves  thus  far  used  for  illustrating  our  line  of  reason- 
ing represent  the  degree  of  an  individual's  impulse  and  re- 
straint. So  long  as  we  were  analyzing  the  relation  of  one 
single  individual  to  production  and  consumption,  only  that 
individual's  feeling  could  be  taken  into  account.  It  was  neces- 
sary to  leave  the  comparison  of  a  satisfaction — enjoyment  of  a 
utility — with  a  strain — productive  effort — to  the  judgment  of 
the  individual.  But  now,  when  we  come  to  examine  the  likes  and 
dislikes  of  two  persons,  these  cannot  be  compared  unless  we 
find  a  way  of  rendering  them  in  terms  of  some  concrete  de- 
nominator. And  since  the  contemplated  exchange  of  wheat 
and  wine  is  a  case  of  simple  barter,  either  of  the  two  com- 
modities can  serve  as  the  value  denominator. 

By  selecting  a  bushel  of  wheat  as  the  denominator,  the 
desire  for  wine  is  to  be  estimated  in  terms  of  wheat.  The 
wine-grower  would  then  be  the  seller,  the  wheat-raiser  the 
buyer.  The  wheat  would  be  the  medium  of  payment — the 
"money,"  and  the  wine  the  subject  of  purchase — the  "mer- 
chandise. ' ' 


48]  VALUE  49 

48.  The  Buyer's  Price  Limit. — The  problem  now  before  us 
is  to  learn  how  each  of  the  men  compares  his  desire  for  wine 
with  his  desire  for  wheat.  This  task  would  seem  to  present 
some  difficulty,  inasmuch  as  the  desire  of  each  for  wine  as  well 
as  that  for  wheat  differs  in  degree  according  to  quantity  in 
hand  (36-38).  How  can  we  compare  one  variable  desire  with 
another  ? 

Suppose  that  in  Fig.  5  the  horizontal  dimension  represents 
gallons  of  wine,  while  the  vertical  dimension  represents  the 
estimate  of  wine  per  gallon  in  terms  of  wheat,  the  scale  of 
valuation  being  marked  off  in  bushels  and  pecks. 

Let  us  assume  the  wheat-raiser's  desire  for  wine  to  be  such 
that,  could  he  obtain  no  more  than  one  gallon,  he  would  be 
willing  to  lose  3  bushels  of  his  store  of  wheat  rather  than  go 
without  the  wine.  His  valuation  of  the  first  gallon  is,  accord- 
ingly, 12  pecks  of  wheat.  But  he  would  not  buy  2  gallons  at 
this  rate,  for  his  desire  for  the  second  gallon  is  not  so  great  as 
that  for  the  first,  and  the  additional  3  bushels  of  wheat  which 
he  would  have  to  give  up  are  regarded  by  him  as  of  more  im- 
portance than  the  first  3  bushels  of  his  stock  which  he  was 
willing  to  give  for  the  first  gallon.  For  2  gallons  he  would  not 
agree  to  give  more  than,  say,  5i/^  bushels,  which  would  make  11 
pecks  the  rate  per  gallon.  The  acquisition  of  each  additional 
gallon  of  wine  would  be  attended  by  a  reduction  of  his  desire 
for  more,  while  his  reluctance  to  part  with  each  further  bushel 
of  wheat  would  increase.  For  3  gallons  he  would  perhaps  re- 
fuse to  give  more  than  30  pecks,  or  10  pecks  per  gallon.  For 
4  gallons  he  might  offer  36i^>  pecks,  or  9%  pecks  per  gallon. 
His  valuation  of  5  gallons  might  be  41  pecks,  corresponding 
with  a  rate  of  8V5  pecks.  Thus  with  each  additional  gallon  to 
be  added  to  his  purchase  the  price  he  would  be  willing  to  pay 
per  gallon  would  be  reduced,  and  this  reduction  can  be  repre- 
sented by  the  descending  curve  DD',  which  depicts  the  wheat- 
raiser's  desire  for  the  merchandise  "wine"  expressed  in  terms 
of  the  denominator  "wheat."  It  graphically  represents  what 
may  be  termed  the  "buyer's  price  limit,"  that  is,  the  highest 
price  he  would  be  willing  to  pay  for  any  one  of  the  successive 
gallons  of  wine,  provided  always  that  this  is  the  rate  for  the 
4 


60  FUNDAMENTAL  CONCEPTS  [49 

entire  purchase,  ii  serves  to  show  how  much  the  individual 
is  willing  to  buy  at  any  given  rate.  Were  this  rate  equal  to 
Op',  he  would  buy  the  quantity  p'd',  that  is,  7  gallons.  If  the 
price  per  gallon  were  lowered  to  Op",  his  desire  for  a  store 
of  wine  would,  under  the  given  conditions,  increase  to  the 
amount  p"d",  or  16  gallons. 

49.  The  Seller's  Price  Limit. — The  mental  process  of  com- 
paring wine  with  wheat  on  the  part  of  the  wine-raiser  can  be 
similarly  examined.  The  first  gallon  that  he  would  sell  would 
be,  of  course,  that  one  which  he  could  most  easily  spare  and  to 
which  he  would  give  the  least  consideration,  while  the  wheat 
he  would  get  for  it,  being  the  first  portion  coming  into  his 
possession,  would  be  most  welcome  to  him  and  therefore  most 
highly  valued.  We  may  assume  that  his  evaluation  of  this 
one  gallon  of  his  wine  would  equal  his  evaluation  of  the  first 
iy2  pecks  of  wheat,  and  that  he  would  agree  to  an  exchange 
at  this  rate  if  he  could  not  obtain  it  on  better  terms.  But  this 
does  not  imply  that  he  would  be  willing  to  give  2  gallons  for 
3  pecks,  for  he  would  naturally  be  more  reluctant  to  part  with 
the  second  gallon  than  with  the  firet,  while,  at  the  same  time, 
the  second  lot  of  wheat  which  he  obtains  would  be  of  less  im- 
portance to  him  than  the  first.  He  would  perhaps  be  willing 
to  accept  31/4  pecks,  which  corresponds  to  a  price  of  1%  pecks 
per  gallon.  His  estimate  per  gallon  would  rise  as  the  number 
of  gallons  to  be  parted  with  increases.  All  this  may  be  in- 
dicated by  the  curve  SS'  (Fig.  5),  which  represents  the  "  sell- 
er's price  limit"  in  terms  of  wheat.  At  a  rate  equal  to  Op' 
his  offer  would  amount  to  p's'  gallons ;  at  the  rate  Op"  his  offer 
would  amount  to  p"s"  gallons. 

The  curves  of  the  diagram  now  represent  the  desire  of  the 
purchaser  to  acquire  and  the  reluctance  of  the  seller  to  part 
with  the  wine,  measured  in  terms  of  the  same  concrete  de- 
nominator, namely,  wheat,  and  this  enables  us  to  consider  the 
two  men's  estimates  conjointly. 

This  example  may  be  taken  as  the  prototype  of  many 
similar  cases,  all  of  which  can  be  treated  in  practically  the 
same  way.  The  men  may  not  have  the  objects  of  exchange  on 
hand,  but  may  expect  to  produce  them,  which  would  imply 


50]  VALUE  51 

that  the  increasing  reluctance  to  put  forth  greater  effort  takes 
the  place  of  the  increased  reluctance  to  diminish  the  store  on 
hand.  Or,  instead  of  merely  two  kinds  of  goods,  a  greater 
number  may  be  included  in  the  problem.  One  of  them  may 
again  be  chosen  as  the  denominator,  but  the  problem  itself, 
while  becoming  more  complicated,  would  present  no  essen- 
tially new  features.  At  all  events,  the  case  here  considered 
is  typical  of  all  direct  exchanges  of  labor's  products. 

50.  Exchange  Rate  in  Barter. — We  are  now  prepared  to 
follow  up  the  process  by  which  the  two  traders  reach  an  agree- 
ment regarding  the  rate  of  exchange. 

During  their  negotiations  they  may  at  first  try  to  agree 
upon  the  price  Op'  (Fig.  5),  namely,  7  pecks.  At  this  price 
the  buyer  would  want  to  take  7  gallons  of  wine,  as  measured 
by  the  space  p'd',  w^hile  the  seller  would  want  to  sell  the  greater 
amount  y's' ,  namely,  15  gallons.  He  finds,  however,  that  he 
cannot  persuade  his  neighbor  to  increase  his  purchase  except 
by  lowering  the  proposed  price.  Had  the  negotiations  initially 
been  based  on  a  price  equal  to  Op" ,  or  1  bushel  per  gallon, 
the  buyer  would  have  been  ready  to  take  p"d",  that  is,  16 
gallons,  while  the  seller  would  have  been  unwilling,  at  that 
price,  to  sell  more  than  j/'s" ,  or  11  gallons,  and  only  by 
agreeing  to  a  higher  price  is  the  buyer  able  to  induce  the  seller 
to  part  with  a  greater  quantity.  In  the  first  case  the  negotia- 
tions tended  toward  a  lowering  of  the  price,  in  the  second 
toward  a  rise.  The  evident  tendency  is  toward  a  price  equal 
to  Op  or  qa,  namely,  5  pecks.  At  this  price  both  men  will 
agree  upon  the  quantity  measured  by  the  space  Oq,  namely, 
12  gallons. 

This,  then,  is  the  natural  price  under  the  assumed  premises. 
That  price  is  at  the  point  where  the  want  of  the  one  party  for 
the  wine  and  the  want  of  the  other  party  to  the  wheat  coin- 
cide. It  is  located  at  the  intersection  of  the  curves  of  the 
diagram  and  indicates  not  only  the  price,  but  also  the  quantity 
of  the  exchange. 

It  is  tmo  that  traders  are  perhaps  never  actually  conscious 
of  any  such  mental  process  as  that  above  outlined  and  by 
which  an  agreement  on  the  price  is  finally  reached.    But  how- 


52  FUNDAMENTAL  CONCEPTS  [51. 62 

ever  the  negotiations  may  proceed,  each  of  the  parties  in- 
tuitively follows  his  inclinations,  and  it  is  these  inclinations 
that  have  been  graphically  represented  in  the  diagram. 

We  have  here,  of  course,  left  out  of  account  chance  factors, 
such,  for  instance,  as  a  possible  difference  in  the  power  of 
persuasion,  or  capacity  of  salesmanship,  which  may  affect  the 
result  one  way  or  the  other.  The  proposition  is  true  only  as 
regards  the  average. 

51.  Buying  and  Selling. — In  the  above  illustration  wheat 
has  been  adopted  as  the  denominator  of  value,  and  wine  has 
been  treated  as  the  merchandise  of  which  the  price  was  under 
consideration.  What  would  have  been  the  result  if  we  had 
chosen  wine  as  the  denominator  and  the  means  of  payment 
and  wheat  as  the  merchandise  ? 

The  two  men  would  merely  have  changed  places  as  buyer 
and  seller.  A  graphical  examination  of  their  respective  wants 
would  require  the  tracing  of  a  curve  denoting  the  wine- 
grower 's  desire  for  wheat  in  terms  of  wine,  and  another  repre- 
senting the  w^heat-grower's  reluctance,  also  in  terms  of  wine, 
to  dispose  of  his  wheat.  But,  manifestly,  we  would  then  have 
had  to  deal  with  quantities  that  are  the  exact  reciprocals  of 
those  considered  in  the  first  instance,  and  the  ordinate  of  the 
point  of  intersection  of  the  curves  would  have  been  the  nu- 
merical reciprocal  of  the  corresponding  result  previously  ob- 
tained; and  since  the  price  of  w^heat  in  terms  of  wine  is  the 
reciprocal  of  the  price  of  wine  in  terms  of  wheat,  the  final 
conclusion  regarding  the  exchange  rate  would  be  identical 
with  that  of  the  first  case. 

It  is  thus  apparent  that  it  is  immaterial  which  of  the  two 
ways  is  adopted.  The  terms  "buyer"  and  "seller"  are  not 
only  correlative,  meaning  that  where  there  is  a  buyer  there 
must  also  be  a  seller,  but  they  are  also  reciprocal,  meaning  that 
each  buyer  is  also  a  seller  (34,  52).  Every  buyer  of  one 
thing  is  a  seller  of  that  which  he  gives  in  payment;  everj' 
seller  is  a  buyer  of  that  which  he  receives  in  pajinent. 

52.  The  Market. — We  now  enter  upon  the  third  and  last 
stage  of  the  study  of  value,  namely,  the  process  by  which 
values  are  determined  in  the  general  market. 


6S]  VALUE  63 

Since  it  is  impossible  to  compass  extended  commerce  by 
means  of  simple  barter,  recourse  has  long  ago  been  had  to  a 
process  of  complex  barter  through  some  mediiun  of  exchange 
(83),  and  instead  of  one  kind  of  goods  being  exchanged  for 
another  directly,  it  has  become  universal  practice  to  give 
goods  or  services  for  money,  and  then  to  use  the  money  to 
procure  other  goods.  The  final  outcome  is,  however,  nothing 
more  than  the  exchange  of  goods  for  goods. 

In  barter  there  can  be  no  specific  distinction  between  buy- 
ing and  selling.  But  where  a  medium  of  exchange  is  used  it 
has  become  customary  to  apply  the  term  "buying"  to  the 
giving  of  money  for  goods,  and  the  term  "selling"  to  the 
giving  of  goods  for  money.  This  distinction  is,  however, 
purely  conventional.  The  law  that  governs  exchange  rates 
is  as  controlling  in  sales  as  it  is  in  barter.  It  still  remains 
true  that  the  seller  of  goods  is  a  buyer  of  money,  and  the  buyer 
of  goods  a  seller  of  money.  In  the  last  analysis,  the  terras 
remain  both  correlative  and  reciprocal  (51). 

The  general  market  may  be  considered  as  being  composed 
of  numerous  market  centres,  each  of  which  is  again  divided 
into  sub-centres.  In  our  present  analysis  it  may  be  prefer- 
able to  consider  a  merely  local  market.  Such  a  market  is  sup- 
posed to  include  only  a  limited  number  of  buyers  and  sellers. 
In  point  of  fact,  however,  in  so  far  as  all  markets  are  in 
communication,  practically  all  kinds  of  merchandise  can  be 
had  in  any  of  them. 

As  regards  any  one  kind  of  goods,  we  find  in  the  market 
a  certain  number  of  individuals  seeking  to  buy  them,  and  a 
certain  number  of  others  offering  to  sell  them.  It  is  the  inter- 
relation of  these  buyers  and  sellers  that  we  have  next  to 
review. 

53.  The  Common  Value  Denominator. — It  has  been 
shown  before  (39)  how  cvalnaticms  represented  by  several 
curves  may  be  compounded.  But  this  can  be  done  only  if 
the  evaluations  represented  by  these  curves  are  expressed  in 
identical  terms.  When  studying  an  isolated  excliange,  wo 
were  free  to  adopt  as  denominator  either  one  of  the  things  to 
be  exchanged.  But.  if  f)ur  prosent  inquiry  were  to  refer,  for 
instance,  to  the  v;ilu»'  of  wine,  whidi  is  desired  not  only  by 


54  FUNDAMENTAL  CONCEPTS  [54 

the  farmer,  but  also  by  the  butcher,  the  baker,  and  others, 
we  could  not  compound  the  various  estimates  of  wine  by  the 
would-be  buyers  if  one  estimate  were  expressed  in  terms  of 
bushels  of  wheat,  another  in  terms  of  pounds  of  meat,  and  a 
third  in  terms  of  loaves  of  bread.  It  will  be  necessary  to  have 
all  these  evaluations  expressed  in  terms  of  the  same  denom- 
inator. This  is  equally  true  as  regards  the  evaluations  by  the 
would-be  sellers.  In  the  actual  market  this  difficulty  is  met 
by  the  use  of  the  conventional  unit  of  value,  the  dollar,  the 
mark,  the  franc.  The  evaluation  of  the  unit,  both  from  the 
viewpoint  of  the  producer  and  that  of  the  consumer,  becomes 
so  fixed  in  the  mind  of  each  that  it  serves  as  a  standard  by 
which  the  value  of  other  things  is  estimated. 

54.  Appraisement  of  the  Value  Unit. — Each  man's 
estimate  of  the  worth  of  a  dollar  is  primarily  traceable  to  his 
experience  in  the  market.  A  workman  learns  to  know  how 
much  of  his  labor  is  required  to  earn  a  dollar,  or  how  many 
dollars  he  can  obtain  for  a  week's  work.  An  artisan,  by 
selling  his  products,  obtains  a  conception  of  the  relation  which 
his  efforts  bear  to  the  unit  of  value.  Experience  also  gives  an 
idea  of  the  amount  of  satisfaction  to  be  derived  from  a  dollar 
when  applied  to  purchases  in  the  market.  In  this  way  the 
dollar  becomes,  to  all  who  have  to  buy  or  to  sell,  a  standard 
for  measuring  both  effort  and  gratification  of  every  kind. 

Experience,  however,  is  not  the  final  criterion  of  the  value 
of  the  unit.  In  the  last  analysis  the  faculty  of  the  dollar — 
that  is  to  say,  a  specified  amount  of  gold — to  serve  as  a 
measure  of  effort  must  be  traced  to  the  effort  required  for 
the  production  of  the  gold  of  which  the  dollar  consists,  and 
its  faculty  to  serve  for  measuring  gratification  must  be  de- 
rived from  the  capacity  of  gold  to  actually  gratify  desire. 
Yet,  in  any  given  market,  there  may  not  be  a  single  person 
who  is  mining  gold,  and  perhaps  but  a  few  who  desire  this 
metal  for  industrial  or  other  purposes.  How,  then,  can  those 
who  neither  produce  nor  actually  use  this  metal  obtain  a 
correct  estimate  of  its  capacity  as  a  measure  for  either  effort  or 
gratification  ? 

In  the  ease  of  exchange  by  barter  we  had  tentatively 


651  VALUE  65 

assumed  that  the  seller  of  goods  is  the  producer,  while  the 
buyer  is  the  consumer,  and  that  through  direct  intercourse  of 
producer  and  consumer  the  value  of  the  goods  is  determined 
(58).  But,  in  point  of  fact,  the  merchant  who  sells  goods  to 
the  consumer  is  only  the  last  one  of  a  number  of  those  who 
have  contributed  their  efforts  to  the  production  of  the  thing 
sold.  Producers  and  consumers  are,  accordingly,  not  in  that 
direct  contact  which  we  have  tentatively  assumed.  This  does 
not,  however,  vitiate  our  conclusion.  In  the  course  of  pro- 
duction the  goods  really  pass  by  way  of  exchange  through 
quite  a  number  of  hands,  and  it  is  through  these  exchanges 
that  an  economic  contact,  so  to  speak,  is  established  between 
producer  and  consumer.  Those  through  whose  hands  the 
goods  pass  in  the  process  of  exchange  obtain  a  true  idea  of 
their  value  through  experience  in  the  market.  And  through 
the  same  kind  of  experience  as  that  which  gives  a  merchant 
knowledge  of  the  value  of  goods  in  which  he  deals,  though  he 
may  be  neither  producer  nor  consumer  of  these  goods,  every- 
body learns  to  appraise  the  dollar  both  as  a  measure  of  effort 
and  of  gratification  (31). 

55.  Interdependence  of  Prices. — Suppose  we  are  to  de- 
tennine  the  value,  in  terms  of  dollars,  of  a  single  commodity, 
say  wine.  In  order  to  do  so  we  have  to  assume  that  its  various 
evaluations  by  the  farmer,  the  butcher,  or  the  baker  are  stated 
in  terms  of  dollars.  As  indicated  before  (47-48),  these  men 
can  express  their  several  desires  for  wine  in  terms  of  wheat, 
meat,  or  bread,  respectively,  but  in  order  to  express  these 
desires  in  terms  of  dollars  they  must  have  knowledge  of  the 
prices  of  wheat,  meat,  or  bread  expressed  in  the  same  terms, 
for  otherwise  neither  farmer,  butcher,  nor  baker  could  have  a 
conception  of  what  a  dollar  is  worth.  The  question  at  once 
arises:  On  what  ground  can  we  assume  the  price  of  all  com- 
modities other  than  the  one  under  examination  to  be  known 
before  we  have  found  how  the  price  of  any  one  of  them  is 
determined?     This  question  has,  accordingly,  to  be  answered. 

The  conditions  under  which  market  prices  become  estab- 
lished have  prevailed  for  ages.  Upon  examining  tlio  records 
of  the   past  it   is   found   that  the   prices  of  most  products, 


56  FUNDAMENTAL  CONCEPTS  [56 

especially  of  staple  articles,  usually  fluctuate,  within  narrow 
limits,  above  and  below  a  mean  rate  which  changes  but  gradu- 
ally and  which  bears  a  close  relation  to  the  effort  of  producing 
things.  But  when  a  new  article  is  brought  into  the  market, 
its  price  does  not  at  once  conform  to  this  rule,  and  is  often 
subject  to  considerable  fluctuations  which  only  gradually  sub- 
side until  the  price  reaches  a  comparatively  uniform  level 
bearing  the  normal  relation  to  the  effort  of  production. 

This  would  indicate  that  prices  of  different  things  in  the 
market  are  not  detei-mined  independently,  but  are  the  result 
of  a  gradual  adjustment  to  prevailing  conditions.  And  the 
law  of  value,  being  an  expression  of  the  process  of  this  adjust- 
ment, can  do  no  more  than  state  the  general  conditions  under 
which  equilibrium  of  prices  prevails.  We  are  therefore 
justified  in  taking  the  market  as  we  find  it  and  confining  our 
inquiry  to  the  question  whether  the  current  price  of  any 
given  article  under  given  conditions  has  a  tendency  to  rise,  to 
fall,  or  to  remain  stationary.  It  is  therefore  quite  admissible 
to  assume  that  the  wine-grower,  the  farmer,  the  butcher,  the 
baker,  and,  in  short,  all  possible  sellers  and  buyers  of  wine, 
can  gauge  their  estimates  of  wine  and,  in  fact,  of  any  other 
commodity,  in  terms  of  dollars,  the  value  of  which  they  have 
learned  to  estimate  by  past  experience  in  the  market. 

56.  Price  Limits  Compounded. — When  the  price  limits  of 
all  intending  buyers  of  certain  goods  in  a  market  are  rendered 
in  terms  of  the  same  denominator,  the  dollar,  and  repre- 
sented by  curves  like  the  curve  DD'  of  Fig.  5,  they  can  be  com- 
pounded, as  previously  shown  (39&)  and  represented  by  a 
single  descending  curve.  Similarly,  an  ascending  curve  is  ob- 
tained by  compounding  the  price  limits  of  all  intending  sellers 
of  these  goods. 

Since  the  resulting  curves  would  become  very  much 
elongated,  we  must  adopt  a  reduced  scale  for  quantities  meas- 
ured on  the  horizontal  axis,  so  as  to  bring  the  diagram  of 
combined  price  limits  within  practicable  bounds.  In  this  way 
we  obtain  the  curves  DB'  and  88'  of  Fig.  6,  which  depict  the 
combined  price  limits  of  all  the  buyers  and  all  the  sellers  in 


66]  VALUE  57 

the  market.  The  significance  of  these  curves  may  be  further 
elucidated  as  follows. 

As  regards  any  one  community,  there  can  be,  at  any  given 
time,  only  a  definite  quantity  within  reach  of  the  market. 
These  goods  are  owned  by  a  number  of  individuals,  some  pos- 
sessing a  greater,  others  a  less  quantity  of  them. 

The  total  quantity  of  these  goods  may  be  considered  as 
consisting  of  a  large  number  of  equal  integral  parts  or 
elements,  of  which  each  owner  possesses  a  certain  number. 
Different  owners  place  different  estimates  on  their  respective 
goods  and,  indeed,  each  owner  attaches  a  different  degree  of 
importance  to  each  of  the  elementary  parts  of  his  store  (39a). 
Every  one  of  these  elementary  portions  is  thus  neld  at  an 
evaluation  of  its  own. 

We  could  have  obtained  the  curve  88'  by  supposing  all 
elementary  portions  of  the  commodity  within  reach  of  the 
market — whether  held  for  use  ^'^  or  held  for  sale — to  be  spread, 
figuratively  speaking,  on  the  horizontal  axis  of  the  diagram 
(Fig.  6),  arranged  in  a  rising  order  of  their  evaluations,  with 
the  latter  marked  oft'  as  ordinates. 

In  like  manner  as  we  divided  the  goods  supplied  into 
elementary  parts  we  can,  for  the  purpose  of  analysis,  imagine 
each  supplier  of  the  goods  to  be  divided  into  as  many  ele- 
mentary sellers  as  there  are  elementary  parts  of  his  goods  (16). 
Each,  such  part  would  then  be  owned  by  one  of  these  ele- 
mentary sellers  who  is  correspondingly  located  on  the  curve 
SS'.  The  first  one  of  them  would  be  willing  to  S(>11  the  part 
he  oft'ers  for  a  price  equal  to  OS,  if  he  could  not  obtain  more ; 
but  he  w'ould  not  sell  for  less,  this  being  his  "price  limit"  as 
a  seller.  The  price  limit  of  the  second  is  slightly  higher,  and 
each  following  elementary  seller's  price  limit  is  consecutively 
greater,  as  indicated  by  the  ascent  of  the  curve  88'. 

It  will  be  understood  from  the  method  of  constructing  the 
curve  aS'<S"  that  every  one  of  th(!  actual  sellers  Avho  holds  a 


"  It  may  here  hf  assunicd  that  all  owners  of  tilings  which  are  not 
for  sale  may  be  induced  to  sell  if  the  price  offered  is  high  onoiif,'h. 
These  thingH,  though  not  offered  for  sale,  are,  accordingly,  hold  at  Home 
price  limit,  whatever  tliat  may  be. 


58  FUNDAMENTAL  CONCEPTS  [56 

number  of  elementary  parts,  each  at  a  different  price  limit, 
is  supposed  to  consist  of  the  same  number  of  elementary  sellers 
located  at  various  points  of  the  curve. 

In  the  same  Avay  as  the  curve  SS'  represents  those  who 
have  goods  to  sell,  the  curve  DD'  represents  those  who  desire 
to  purchase  these  goods.  Inasmuch  as  some  of  the  purchasers 
will  buy  a  greater,  others  a  less  quantity,  and  as  the  degree  of 
their  desire  for  each  part  they  want  is  different,  we  must  con- 
sider each  one  of  these  buyers  divided  into  a  number  of 
elementary  intending  buyers  corresponding  to  the  number  of 
parts  he  desires  to  buy.  Every  one  of  these  elementary  buyers 
will  then  have  a  definite  price  limit  of  his  own. 

Arranging  all  elementary  buyers  in  a  falling  series  of  their 
price  limits  and  assigning  to  each  an  ordinate  equal  to  his 
limit,  we  get  a  descending  curve  which  is  identical  with  the 
curve  DD'  of  Fig.  6  as  previously  obtained. 

Just  as  the  curve  SS'  represents  the  sellers'  price  limit,  or, 
more  correctly  speaking,  the  increasing  price  limits  of  the 
consecutively  located  elementarj-  sellers,  so  the  curve  DD'  de- 
picts the  buyers'  price  limit,  or  the  gradually  diminishing 
price  limits  of  the  consecutively  placed  elementary  buyers 
(62).  Every  one  of  the  actual  buyers  of  the  market  is  repre- 
sented by  a  number  of  points  scattered  over  the  entire  curve 
DD'. 

It  is  manifest  that  the  buyers'  price  limit  measures  desire, 
which,  in  turn,  is  prompted  by  the  utility  of  the  goods.  Hence 
the  curve  DD'  represents  ntility,  as  estimated  by  the  con- 
secutive elementary  buyers,  expressed  in  terms  of  the  con- 
ventional value  unit. 

Similarly,  the  curve  SS'  represents  the  varying  degree  of 
reluctance  of  the  intending  sellers  to  part  with  their  goods. 
But  this  reluctance  can  be  viewed  in  two  ways.  When  the 
causes  which  determine  the  momentary  or  current  price  are  in 
question  (59),  we  must  take  into  account  not  only  the  funda- 
mental factors  of  the  case,  but  also  temporary  conditions,  such 
as  irregularities  in  the  supply  or  in  the  demand,  from  what- 
ever cause.  In  this  case  the  curve  ^>S^'  must  be  held  to  include 
all  goods  of  a  kind  within  reach  of  the  market.    But  in  study- 


67]  VALUE  59 

ing  the  causes  that  determine  normal  prices,  in  examining  the 
conditions  under  which  production  is  continued  uniformly,  and 
under  which  the  price  tends  to  remain  unchanged,  we  can  con- 
sider only  the  main  fundamental  factor,  namely,  the  strain 
of  the  effort  required  to  produce  the  goods  for  sale.  In  this 
case  the  sellers'  price  limit  is  the  least  price  that  will  induce 
the  sellers  to  subject  themselves  to  the  strain  of  production. 
Hence  the  curve  88'  in  this  case  represents  the  strain  of 
effort,  and  applies  not  only  to  things  that  have  already  been 
produced,  but  also  to  those  that  may  be  produced  w^henever 
conditions  favor  their  production  (60). 

57.  Relation  of  Supply  and  Demand  to  Price. — Owing  to 
the  inconstancy  of  human  likes  and  dislikes,  as  well  as  to 
changes  in  the  methods  of  production,  the  curves  88'  and  DD' 
are  subject  to  incessant  changes.  But  if  we  are  to  study  the 
causes  involved  in  the  process  by  which  the  value  of  com- 
modities is  determined,  we  must,  at  least  for  the  time  being, 
consider  these  actuating  causes  as  fixed  and  as  definitely 
known.  "We  are  therefore  justified  in  assuming  the  curves 
88'  and  DD'  as  fixed,  without  regard  to  possible  subsequent 
changes.  On  the  basis  of  these  premises  we  must  exclude  from 
our  present  considerations  all  of  those  changes  in  the  market 
which  influence  the  course  of  these  curves. 

The  conditions  represented  by  the  curves  88'  and  DD'  being 
assumed,  the  amount  of  a  given  commodity  that  will  be  offered 
for  sale  depends  upon  the  prevailing  price,  and  the  curve  ^*S" 
represents  the  relation  which  the  market  supply  bears  to  that 
price.  All  those  elementary  portions  of  the  commodity  of 
which  the  price  limit  is  below  the  prevailing  price  will  be 
offered  for  sale,  while  the  remainder  will  be  retained  by  the 
owners. 

Similarly,  the  amount  demanded  in  the  same  market  will 
increase  as  the  price  falls  and  decrease  as  the  price  rises,  and 
the  relation  which  the  amount  demanded  boars  to  the  pre- 
vailing price  is  indicated  by  the  curve  DD'.  Of  all  the  desires 
of  various  degrees  depicted  by  this  curv^e,  those  which  aro 
equal  to  or  greater  than  the  rolnotanco  to  pay  the  prevailing 
price  will  become  effective  in  the  market. 


60  FUNDAMENTAL  CONCEPTS  [58 

If  the  prevailing  price  equals  Op',  the  quantity  supplied 
will  equal  p's'  and  the  quantity  demanded  p'd'.  Or  if  the  price 
were  as  low  as  Op",  the  supply  would  amount  to  p"s"  and  the 
demand  to  p"d".  These  curves,  then,  may  properly  be  regarded 
as  curves  of  supply  and  of  demand,  for  they  depict  how  those 
quantities  are  affected  by  the  prevailing  price  (62). 

58.  The  Law  of  Value. — It  is  manifest  that  business  con- 
ditions can  be  considered  as  normal  only  if  the  amount  of 
goods  produced  and  put  upon  the  market  equals  the  amount 
sold.  The  supply  will  then  equal  the  effective  demand/^ 
"Whenever  more  of  the  goods  are  supplied  than  demanded,  as 
would  be  the  case  if  the  price  should  equal  Op'  (Fig.  6),  the 
excess  remains  unsold  on  the  hands  of  the  sellers.  In  their 
effort  to  sell  they  compete  with  one  another,  and  the  price 
comes  down.  This  lowering  of  the  price  reacts  upon  the 
market  so  that  the  amount  supplied  will  be  reduced  and  the 
amount  demanded  increased,  and  this  process  will  continue 
until  the  quantities  supplied  and  demanded  become  equal.  On 
the  other  hand,  suppose  the  amount  demanded  at  any  time 
to  exceed  the  amount  supplied,  as  would  be  the  case  if  the 
price  equals  Op".  All  who  are  disposed  to  sell  at  that  low 
figure  will  have  sold  their  goods  before  all  buyers  are  supplied. 
In  their  efforts  to  purchase,  the  intending  buyers  will  com- 
pete against  each  other,  causing  a  rise  of  the  price,  which  is 
eventually  followed  by  an  increase  of  the  supply  and  a  de- 
crease of  the  demand,  and  this  will  continue  until  the  quantity 
supplied  and  the  quantity  demanded  become  equal. 

A  glance  at  the  diagram  shows  that  equality  between  the 
amount  supplied  and  the  amount  demanded  can  persist  only 
if  the  price  equals  the  ordinate  qa  of  the  point  a  at  which  the 
two  curves  intersect.  The  ordinate  Op  therefore  represents  the 
rate  to  which  the  price  will  tend. 

The  law  of  value,  or,  more  properly,  the  law  of  price, 

"As  a  matter  of  fact,  the  amount  of  goods  brought  to  market 
usually  slightly  exceeds  the  amount  actually  sold.  In  the  process  of 
selling  a  small  percentage  may  perish  or  otherwise  become  unsalable 
(13).  The  difference  due  to  this  cause  is  here  ignored.  Its  effect  on 
prices  will  be  discussed  later  (219). 


58]  VALUE  61 

accordingly  involves  two  propositions:  (1)  a  rising  price  of 
any  commodity  tends  to  increase  the  supply  of,  and  to  reduce 
the  demand  for,  that  commodity,  while  a  falling  price  has  the 
opposite  effect;  and  (2)  an  excess  of  the  amount  supplied 
over  the  amount  demanded  causes  the  price  to  fall,  and  vice 
versa.  The  natural  result  is  that  the  price  of  a  commodity  will 
always  tend  to  that  point  at  ivhich  the  amount  supplied  equals 
the  amount  demanded. 

It  should  be  observed  that  the  law  of  value,  or,  as  it  is  often 
called,  the  law  of  supply  and  demand,  has  reference  really  to 
the  exchange  rate  of  two  commodities  or  sets  of  commodities.  A 
law  of  supply  and  demand  is  conceivable  only  if  two  separate 
commodities  are  held  in  view.  In  the  case  of  the  two  settlers  we 
studied  the  exchange  rate  of  wheat  and  wine,  and  when  we 
came  to  consider  the  general  market  for  wine  we  found  a  way 
to  substitute  the  standard  commodity,  gold,  for  the  wheat  of 
the  preceding  illustration. 

Like  all  economic  propositions,  the  law  of  value  indicates 
only  general  tendencies,  and  departures  from  the  indicated 
result  may  occur  in  either  direction.  But  whenever  such  de- 
partures do  occur,  a  tendency  to  restore  normal  conditions  at 
once  comes  into  play. 

It  may  be  well  to  call  attention  to  the  fact  that  we  have  all 
along  considered  the  buyer  to  be  the  consumer  and  the  seller 
the  producer  (54).  "We  have  taken  into  account  only  the  con- 
sumers' demand,  namely,  that  which  arises  directly  from  a 
desire  for  gratification;  and  only  the  producers'  supply,  a 
supply  which,  for  natural  reasons,  requires  the  stimulus  of  a 
recompense,  and  which  is  regulated  by  the  relation  which  that 
recompense  bears  to  the  effort  (115,  153).  In  the  absence  of 
extraneous  restraint,  desire  for  gratification  and  reluctance  to 
exertion  are,  indeed,  the  only  factors  in  the  determination  of 
value  (03). 

As  intimated  above,  the  conditions  which  govern  supply 
and  demand  undergo  change  from  time  to  time.  For  example, 
production  may  bo  made  easier  through  an  iuvoutiou,  oi-  the 
demand  may  be  affected  through  a  change  in  fashion.  The 
curves  8S'  and  DD'  will  then  change  their  course,  and  Ihn 


62  FUNDAMENTAL  CONCEPTS  [59 

point  of  intersection  will  shift  in  consequence.  According  as 
these  influences  are  of  a  temporary  or  of  a  persistent  nature, 
they  have  a  correspondingly  brief  or  lasting  effect  on  prices, 

59.  Current  Price. — As  already  stated,  the  total  of  all 
things  that  are  at  any  given  time  within  compass  of  the 
market  is  always  limited  (56).  Some  of  these  things  are  for 
sale  at  the  current  price,  others  are  held  for  a  rise,  and  again 
others  are  held  for  use  and  are  not  for  sale,  except,  perhaps, 
at  an  unusual  price.  For  the  time  being,  each  element  of 
the  total  supply  is  held  at  a  definite  price  limit.  There  is 
also  a  demand  composed  of  a  number  of  elementary  demands, 
each  having  a  certain  price  limit. 

If  0^  of  Fig.  6  represents  the  total  of  any  particular  kind 
of  goods,  the  curve  SS',  embracing  the  sellers'  price  limits 
of  these  goods,  cannot  go  beyond  Q.  The  range  of  price 
limits  of  both  sellers  and  buyers  being  given  in  the  form  of 
the  curves  SS'  and  DD',  the  tendency  of  the  price  is  toward 
the  rate  Op,  which  equals  the  ordinate  of  the  point  a  of 
intersection. 

Both  curves  of  the  diagram  cut  each  other  in  two.  The 
branch  Da  of  the  demand  curve  embraces  all  the  buyers  who 
find  goods  in  the  market  at  a  price  below  their  limits  and, 
therefore,  at  a  price  acceptable  to  them.  The  buyers  near  the 
initial  point  D  of  the  curve  find  the  price  materially  below 
that  which  they  would  be  willing  to  give  rather  than  go  with- 
out the  goods,  while  those  near  the  point  a  find  the  price  but 
slightly  below,  or  practically  equal  to,  their  respective  price 
limits.  The  intending  buyers  on  the  branch  aD'  are  those  who 
will  not  buy,  because  their  desire  for  the  goods,  as  repre- 
sented by  their  price  limits,  does  not  come  up  to  the  ruling 
price.  "We  are  here  speaking  of  elementary  buyers  and  not  of 
actual  persons.  If  the  diagram  were,  for  example,  to  refer  to 
food  products,  this  conclusion  would  not  mean  that  high  prices 
would  cause  any  one  to  go  without  food.  It  must  be  remem- 
bered that  a  real  individual,  being  here  assumed  as  divided 
into  a  number  of  elementary  persons,  is  represented  by  a 
number  of  points  distributed  over  the  curve,  and  the  branch 
aD'  embraces  only  those  of  his  desires  which,  because  of  the 


59]  VALUE  6S 

high  price,  remain  unsatisfied.  A  high  price  may  cause  some 
to  retrench  and,  if  need  be,  go  on  short  allowance  of  food,  but 
not  without  any. 

The  branch  Sa  of  the  curve  of  supply  embraces  those  sellers 
who  find  the  market  price  more  or  less  above  their  limits  and 
who,  therefore,  offer  their  goods  for  sale,  while  the  section 
aS'  represents  those  who  decline  to  sell,  preferring  to  retain 
their  goods  for  their  own  use  or  for  a  better  market  (108). 

Only  the  goods  embraced  beween  0  and  q  will  be  marketed. 
The  sellers  included  in  the  branch  Sa  will  dispose  of  their 
goods  to  the  buyers  included  in  the  branch  Da.  As  these  ex- 
changes proceed,  the  buyers  included  in  the  branch  Da  become 
possessors,  like  those  included  in  the  curve  aS',  and  by  com- 
bining all  these  possessors  and  placing  them  in  a  rising  order 
of  their  price  limits,  in  other  words,  by  compounding  the 
curves  Da  and  aS\  the  curve  pS"  is  obtained,  which  embraces 
all  possessors  of  the  goods  who  will  not  sell,  because  they 
prefer  the  goods  to  the  price. 

At  the  same  time,  the  elements  of  the  curve  Sa,  namely, 
the  sellers  who  have  disposed  of  their  goods,  will  be  in  the 
same  class  as  the  intending  purchasers  who  decline  to  buy 
because  the  ruling  price  exceeds  their  limits  and  who  compose 
the  branch  aD' ;  and  by  proceeding  to  combine  both  classes 
into  one,  the  curve  pD"  is  obtained.  This  curve,  accordingly, 
embraces  all  who  have  none  of  these  goods  in  their  possession. 
Further  exchanges  thereupon  cease,  because  the  price  limits  of 
the  possessors  exceed  those  of  the  intending  buyers.  The  price 
remains  the  same  as  before,  namely.  Op,  the  point  p  being  now 
at  the  junction  of  the  two  new  curves.  The  price  does  not 
change  so  long  as  the  respective  price  limits  and  the  total 
amount  of  the  goods  remain  the  same. 

If  there  were  no  subsequent  changes,  such  as  will  be  dis- 
cussed presently,  this  would  be  the  end  of  all  buying  and  selling 
of  the  goods  in  question.  Those  whose  price  limits  are  higher 
than  the  prevailing  price  will  remain  the  ownei-s,  and  those 
whose  price  limits  are  lower  than  that  price  will  go  without 
them,  the  point  of  division  being  determined  by  the  (piantity  of 
goods  within  reach.     The  curves  pS"  and  pD"  show  approx- 


64  FUNDAMENTAL  CONCEPTS  [60 

imately  the  condition  that  prevails  with  respect  to  things  that 
cannot  be  reproduced  at  all,  such  as  old  coins,  rare  editions  of 
books,  and  the  like. 

In  a  measure,  like  conditions  arise  periodically  with  regard 
to  things  of  which  the  production  is  intermittent,  such  as  farm 
products.  Even  though  a  crop  may  be  a  partial  failure,  the 
farmers  usually  have  a  greater  quantity  of  their  products  on 
hand  than  they  need  for  their  own  use,  and  their  evaluation 
of  their  surplus,  gauged  on  the  score  of  utility  to  themselves, 
is  materially  lower  than  that  of  intending  buyers.  But  the 
total  quantity  brought  to  market  being  below  the  average,  the 
market  conditions  are  such  as  presented  in  Fig.  7  by  the 
curve  RR',  where  the  distance  OQ'  represents  the  total  quantity 
in  stock.  A  glance  shows  the  reason  for  the  high  prices, 
measured  by  gV,  in  years  of  poor  crops.  The  sale  of  the  goods 
will  then  for  the  time  being  bring  about  conditions  similar 
to  those  depicted  in  the  curves  p8"  and  pD"  of  Pig.  6. 

On  the  other  hand,  an  unusually  abundant  crop,  indicated 
in  Fig.  7  by  the  curve  TT',  often  depresses  the  market  price 
to  a  point  where  it  does  not  pay  to  transport  all  the  products 
to  market,  and  farmers  have  at  times  allowed  part  of  their 
crops  to  rot  in  the  field,  or  have  otherwise  destroyed  them  or 
put  them  to  an  inferior  economic  use. 

In  the  actual  market  the  buying  and  selling  even  of  such 
goods  as  cannot  be  reproduced  never  comes  to  a  complete 
standstill.  There  will  be  changes  in  the  conditions  of  the 
market  due  to  the  mutations  of  life,  like  sporadic  changes  of 
fancy,  vagaries  of  fashion,  death  of  owners,  the  advent  of  the 
rising  generation,  any  of  which  disturb  the  equilibrium,  so 
that  some  of  these  goods  reappear  from  time  to  time  in  the 
market. 

6o.  Normal  Price. — When  we  come  to  goods  that  are  con- 
sumed by  the  buyers,  while  new  goods  are  supplied  by  the 
producers,  exchanges  continue  indefinitely.  Former  buyers, 
after  consuming  the  goods  purchased,  reappear  as  buyers. 
Former  sellers,  after  replenishing  their  stock,  again  appear  as 
possessors  and  sellers. 

The  current  prices  of  such  products  are  subject  to  the 


60]  VALUE  65 

momentary  supply  of  the  goods  in  question  and  to  the  imme- 
diate demand.  Both  supply  and  demand  are  constantly  in- 
Hueneed  by  fortuitous  conditions  apart  from  those  that  regu- 
late production  and  consumption,  conditions  that  give  rise  to 
the  well-known  irregular  but  mostly  inconsiderable  fluctuations 
of  market  values  (278). 

But  apart  from  adventitious  eirciunstances,  both  supplj^ 
and  demand  are  subject  to  fundamental  conditions  which 
determine  average  or  normal  prices.  In  order  to  learn  what 
determines  the  average  or  normal  supply  and  demand,  we 
have  to  delve  into  the  ulterior  conditions  that  regulate  the 
continuance  of  supply  and  demand,  namely,  production  and 
consumption,  apart  from  the  merely  accidental  influences  that 
cause  at  most  temporary  departures  from  normal  conditions. 
When  the  law  of  normal  prices  is  to  be  traced,  we  must  ascribe 
to  the  curves  S8'  and  DD'  a  significance  different  from  that 
heretofore  ascribed  to  them.  The  horizontal  abscissas  must  be 
understood  as  measuring  a  stream  or  current,  that  is,  quantity 
per  unit  of  time  instead  of  simply  quantity  (37).  The  ascend- 
ing supply  curve  88'  (Fig.  6),  then,  indicates  how  production 
is  stimulated  by  a  rising  price,  while  the  descending  demand 
curve  DD'  depicts  the  coincidence  of  increasing  consumption 
with  the  falling  of  the  price.  Instead  of  asking  at  what  price 
a  seller  is  willing  to  part  with  his  goods,  we  must  inquire  what 
effect  price  has  on  the  continuance  of  production.  Instead  of 
asking  at  what  price  a  buyer  is  willing  to  purchase,  we  must 
inquire  what  effect  price  has  on  continuance  of  consumption. 
We  have  now  to  deal  with  dynamic  and  not  with  static  con- 
ditions. 

When  things  are  taking  their  normal  course,  the  rate  of 
production  continues  uniformly.  Only  when  the  market  be- 
comes disturbed  by  some  cause  of  a  permanent  nature  will  tlie 
production  of  the  goods  in  question  be  increased  or  reduced. 
At  present  we  shall  consider  only  the  normal  case,  leaving  the 
study  of  such  disturbances  for  a  later  stage  of  our  discussion 
(221).  The  ordinates  of  the  successive  elements  of  the  curve 
88'  then  repn-spnt  the  lowest  reeompens(!  at  whicli  the  various 
producers  continue  to  produce  and  supply  the  market,  and 
5 


66  FUNDAMENTAL  CONCEPTS  [61 

the  curve  DD'  the  highest  cost  at  which  the  different  con- 
sumers continue  to  consume.  The  section  Sa  of  the  supply 
curve  88'  represents  those  producers  who,  while  the  price 
equals  Op,  continue  to  follow  their  vocation  and  keep  the 
market  supplied,  while  the  branch  a8'  comprises  those  who 
could  produce  the  goods  in  question,  but  who  find  other  occu- 
pations more  remunerative  (56). 

When  we  come  to  a  study  of  the  distribution  of  wealth,  the 
causes  that  regulate  normal  values  will  alone  have  to  be  con- 
sidered, since  the  problem  deals  with  the  regular  course  of 
economic  activity  apart  from  merely  temporary  influences. 

6i.  Cost,  the  Sellers*  Price  Limit. — It  is  apparent  that  a 
man  will  continue  to  work  in  a  given  occupation  only  so  long 
as  he  cannot,  with  equal  effort,  earn  more  in  some  other 
direction.  He  will  seek  to  follow  that  line  of  employment  in 
which  the  efforts  he  is  prepared  to  put  forth  receive  the  highest 
reward  (44). 

It  is  equally  evident  that  the  compensation  he  may  be  able 
to  obtain  for  equal  exertion  in  his  occupation  of  second  choice 
determines  the  lowest  recompense  he  will  accept  in  his  chosen 
occupation  hefore  he  will  abandon  it.  This,  then,  is  his  price 
limit  as  a  seller  of  his  labor. 

When  a  man  works  in  one  direction,  he  virtually  gives  up 
that  which  he  could  earn  if  he  applied  himself  with  equal 
effort  to  some  other  occupation.  His  earning  capacity  in  this 
latter  direction,  in  his  occupation  of  second  choice  (215),  may 
therefore  quite  appropriately  be  regarded  as  the  cost  of  his 
labor,  it  being  that  which  he  sacrifices  in  producing  what  he 
does.    It  is  that  which  determines  labor's  price  limit  (62). 

The  cost  of  labor  to  the  worker  is,  however,  not  to  be  con- 
fused with  the  value  of  labor,  that  is,  the  cost  of  labor  to  an 
employer.  The  value  of  labor  to  the  employer  is  equal  for 
equal  productivity,  while  the  cost  of  labor,  from  the  stand- 
point of  the  worker,  namely,  his  price  limit,  is  the  lowest 
recompense  he  will  accept  before  changing  the  direction  of  his 
work. 

Different  workers  naturally  have  different  price  limits, 
which,  accordingly,  can  be  represented  by  the  rising  curve 


611  VALUE  67 

SS'  of  Fig.  6,  and  the  value  of  their  efforts  is  at  the  point  of 
intersection  of  this  curve  with  the  curve  DD'  representing  the 
demand  for  such  services,  whatever  the  price  limit  of  any 
single  worker  may  be.  Workers  who  can  earn  nearly  as  much 
in  their  occupation  of  second  choice  as  they  can  in  their  chosen 
occupation  are  located  at  or  near  the  point  a  of  the  inter- 
section, while  those  who  are  skilled  in  but  one  occupation  and 
who  can  make  a  change  only  at  a  disadvantage,  are  situated 
nearer  the  origin  S  of  the  curve. 

This  view  of  the  case  applies  particularly  to  wage  earners 
and  to  those  artisans  who  do  not  employ  assistants.  The  cost 
of  producing  things  becomes  more  complex  where  the  speciali- 
zation of  labor  enters  into  the  problem.  Employers  of  labor 
must  buy  their  raw  materials  and  supplies,  pay  wages  and 
cover  the  regular  charges  for  the  use  of  the  land,  of  the  capital 
goods — namely,  appliances  and  material — and  of  the  money 
needed  in  carrying  on  their  business.  And  if  cost  is  to  be 
considered  from  their  standpoint,  there  must  be  added  to  these 
items  the  "cost"  of  their  own  labor,  namely,  their  possible 
earnings  in  their  occupations  of  second  choice.  This  total  cost 
determines  their  price  limit,  for  if  the  income  of  their  business 
falls  below  this  point,  they  will  endeavor  to  get  into  that 
other  line  of  activity  in  which  they  can  earn  more. 

For  the  same  reason  that  we  assimie  equal  products  in  the 
same  market  to  command  equal  prices,  we  must  also  postulate 
that  labor  which  accomplishes  equal  results  commands  equal 
wages,  independent  of  the  time  or  exertion  spent  in  doing  the 
work,  and  independent  of  the  price  limits  of  the  individual 
workers.  The  cost  of  the  use  of  land  and  of  other  capital  is 
also  assumed  to  be,  in  general,  proportionate  to  the  advantages 
these  afford  to  the  users. 

Let  us  imagine  a  numl)er  of  individuals  who  are  nominally 
owners  of  varioas  business  enterprises,  but  who  do  not  take 
any  part  whatever  in  conducting  their  business,  nor  furnish 
any  part  of  eithor  tho  land  or  the  capital  necessary  (144). 
They  have  accordingly  to  employ  the  manager  as  well  as  all 
oth^r  workors,  to  ront  tho  land  refpiirod  in  the  business  and  to 
borrow  the  capital   needed,  all  at  market  rates.     All   these 


68  FUNDAMENTAL  CONCEPTS  [ei 

nominal  owners  are  accordingly  on  the  same  basis,  none  con- 
tributing in  any  degree  to  the  success  of  the  business,  either 
by  work  or  by  capital,  and  since  all  are  dependent  on  the  same 
market  for  procuring  the  factors  of  production,  the  cost  of 
producing  equal  quantities  of  a  commodity  is  normally  equal 
for  all.  It  will  be  observed  that  ''cost  of  production"  in  this 
sense  differs  from  its  colloquial  meaning.  It  includes  the 
market  value  of  all  services,  those  of  the  organizer  and  man- 
ager and  those  of  the  landowner  and  of  the  capitalist  as  well 
as  wages  of  employes  and  all  other  expenses. 

The  several  items  constituting  cost  in  this  sense  are :  cost  of 
raw  materials,  supplies,  etc.,  including  depreciation  of  means 
of  production ;  cost  of  labor,  or  wages ;  cost  of  the  use  of  land, 
or  rent;  cost  of  the  use  of  capital  goods,  or  capital  interest; 
and  cost  of  the  use  of  money,  or  money  interest.  When  all 
factors  of  production  are  accounted  at  their  market  value,  the 
line  S8'  of  Fig.  6,  representing  cost  of  production  or  the 
sellers'  price  limit,  becomes  a  horizontal  line.  It  is  to  be  re- 
membered that  here,  as  before,  chance  variations  from  nonnal 
conditions  are  to  be  ignored. 

We  can  therefore  conceive  the  line  8S'  as  an  ascending 
curve  only  if  one  or  another  of  the  items  constituting  the 
total  cost  is  not  included  at  its  market  value.  Thus,  when 
the  value  of  labor  or  the  law  of  competition  (148)  is  under 
consideration,  the  line  SS'  must  be  held  as  representing  cost 
in  which  labor  is  not  accounted  at  its  normal  market  value, 
but  at  the  lowest  point  at  which  different  worlmien  will  con- 
tinue to  work  before  turning  from  their  occupation  to  some 
other,  in  short,  at  their  price  limits.  Since  the  price  limits 
are  different  for  different  workers,  the  line  SS'  then  ceases 
to  be  horizontal. 

So  in  examining  the  value  of  the  efforts  of  managing  em- 
ployers, we  must  compute  the  cost  of  the  products  of  their 
business  from  all  business  outlays,  including  cost  of  materials, 
wages  of  employes,  rent  of  land  and  interest  of  all  other  capital 
needed,  to  which  are  to  be  added  their  price  limits  as  employers, 
namely,  their  earning  capacities  in  occupations  of  second  choice. 

When  we  come  to  study  incomes  from  land   (173),  the 


62]  VALUE  69 

sellers'  price  limit  is  to  be  viewed  from  the  standpoint  of  the 
landowners.  Cost  of  production  is  then  made  up  without 
regard  to  any  recompense  for  the  use  of  the  land,  all  remain- 
ing items  being  counted  in  at  their  full  market  value. 

And  when  we  come  to  study  the  earning  power  of  capital 
goods,  that  power  can  be  analyzed  only  by  excluding  from 
"cost"  all  charges  for  the  use  of  capital  goods  (186,  257). 
In  this  way  we  obtain  cost  from  the  capitalists '  standpoint. 

In  the  study  of  the  conditions  which  determine  the  net 
incomes  of  workmen,  of  employers,  of  landowners  and  of 
capitalists  we  have  always  to  eliminate  from  the  total  cost  the 
particular  item  Avhieh  is  under  examination.  Cost  so  accounted 
determines  in  each  case  the  "sellers'  price  limit"  (30). 

62.  Cost  and  Utility  Theories  of  Value. — We  have  learned 
to  view  the  curves  SS'  and  DD'  of  Fig.  6  in  three  different 
ways.  They  represent,  respectively,  the  relation  of  supply  and 
demand  to  current  price  (57),  the  sellers'  and  buyers'  price 
limits  {oG),  and  effort  or  cost  of  production  and  utility  of  the 
product  (61).  To  be  sure,  these  are  merely  three  different 
aspects  of  the  same  functions. 

When  the  two  curves  are  viewed  with  regard  to  effort  and 
utility,  they  point  to  conclusions  that  have  a  definite  bearing 
on  the  two  most  widely  accepted  theories  of  value,  namely,  the 
labor  or  cost  theory  and  the  utility  theory. 

The  curve  SS'  is  drawn  to  illustrate  the  increasing  strain 
of  effort  of  production,  which  finds  its  concrete  expression  in 
the  increasing  "cost,"  as  production  is  carried  on  undei-  in- 
creasingly unfavorable  conditions.  The  ordinate  qa  of  the 
point  a  has  significance  from  several  points  of  view.  It  repre- 
sents not  only  the  effort  rcfiuired  where  production  is  being 
c(jnlinued  under  the  most  unfavoraljle  circumstances,  but  also 
represents  the  normal  value  of  the  product  (180,  257).  In- 
asmuch as  these  two  quantities  are  represented  by  the  same 
ordinate,  they  must  be  ecpial.  It  is  therefore  evident  that 
normal  value  equals  the  effort  of  production  where  it  is  being 
continued  under  the  most  nnfavorn1)le  circumstances.  This 
is  clearly  a  confirmation  of  the  "lalmr"  thcoiy  of  value,  as 


70  FUNDAMENTAL  CONCEPTS  [62 

promulgated  by  Rieardo  (30)  and  known  as  the  classic  theory. 
Its  variant  is  the  ' '  cost ' '  theory. 

In  this  theory  two  data  are  assumed  to  be  known,  namely, 
first,  the  "quantity  of  produce  required,"  that  is,  the  quan- 
tity demanded;  and  second,  the  variable  effort  or  cost  of 
supplying  the  various  elements  of  that  quantity.  Referring 
to  Fig.  6,  these  data  are  the  quantity  Oq  and  the  curve  ^-S". 
It  is  further  assumed  that  the  supply  will  naturally  be  adapted 
to  the  demand,  so  that  the  point  a  locates  the  most  unfavorable 
point  at  which  production  must  be  continued  to  supply  the 
demand.  This  theory  is  therefore  applicable  only  when  the 
normal  price  prevails  and  the  supply  has  adapted  itself  to  the 
demand,  but  is  not  applicable  when  the  current  value  differs 
from  the  normal  value. 

The  effort  expended,  or  the  cost  of  production,  at  the  point 
q,  which  is  the  last  element  brought  into  use  in  order  to  supply 
the  normal  demand,  has  been  denominated  the  "marginal 
effort"  or  "marginal  cost,"  and  the  most  unfavorable  point  at 
which  production  is  normally  continued  is  called  the  ' '  margin 
of  production"  (148). 

The  purport  of  the  curve  DD'  may  be  similarly  analyzed. 
Viewing  this  curve  as  representing  utility,  the  diagram  points 
out  that  of  the  entire  quantity  of  the  goods  brought  to  market 
the  first  element  will  go  to  gratify  a  desire  equal  to  OD,  the 
second  a  desire  of  a  slightly  less  degree,  and  so  on.  All  the 
later  elements  will  cover  consecutively  less  urgent  needs,  and 
the  last  one,  at  the  point  q,  will  satisfy  the  least  important 
of  all  the  desires  that  can  be  gratified  by  the  available  quan- 
tity of  the  goods  Oq.  But  the  ordinate  qa  of  the  last  element 
q  of  the  market  supply,  which  is  the  measure  of  that  least  im- 
portant desire,  represents  the  price  also.  This  agrees  with 
what  is  known  as  the  modern,  the  utility  theory  of  value,  which 
has  been  so  admirably  elaborated  by  Bohm-Bawerk.  According 
to  that  writer  the  value  of  things  is  measured  by  the  impor- 
tance of  that  concrete  want  which  is  least  urgent  among  the 
wants  that  are  met  from  the  available  stock.^^ 

"Cf.  Bohm-Bawerk,  II,  p.  148   (157). 


68]  VALUE  71 

This  theory  assumes  as  known  two  independent  data, 
namely,  first,  the  "available  stock,"  represented  by  Oq  of 
Fig.  6,  and  second,  the  series  of  possible  "wants"  which  this 
stock  can  satisfy  and  which  is  represented  by  the  curve  DD' , 
the  least  urgent  want  satisfied  by  the  supply  being  qa.  The 
theory  fails  to  elaborate  the  conditions  which  determine  the 
normal  supply  and  is  therefore  applicable  only  to  current  or 
temporary  market  value,  and  incidentally  to  normal  value  only 
when  the  actual  supply  happens  to  equal  the  normal  supply 
(153). 

The  importance  of  the  least  want  that  can  be  satisfied  by 
the  available  stock,  in  other  words,  the  utility  of  the  last 
portion  of  the  supply,  is  knowTi  as  the  "final"  or  "marginal 
utility." 

63.  Both  Theories  Corollaries  of  the  Same  Proposition. — 
We  here  find  confirmation  of  two  value  theories  which  are 
generally  regarded  as  incompatible.  At  first  glance  it  would 
indeed  appear  that  only  one  of  them  could  be  correct.  If  value 
be  a  function  of  effort,  how  can  it  be  dependent  on  utility  f 
And  if  determined  by  utility,  it  would  seem  to  be  independent 
of  labor  or  effort.  Yet,  here  we  find  both  theories  confirmed. 
We  have  arrived  at  two  apparently  conflicting  conclusions. 

But  the  explanation  of  this  apparent  incongruity  is  not 
far  to  seek.  In  a  normal  market  final  or  marginal  utility  and 
marginal  effort  or  marginal  cost  are  always  equal  quantities 
(150).  The  point  a  of  Fig.  6,  w^here  the  curves  of  effort  and 
of  utility  meet,  may  be  considered  from  two  standpoints.  It 
is  that  point  of  the  effort  curve  SS'  at  w'hich  the  utility  curv^e 
DD'  intersects  it.  But  it  is  also  that  point  of  the  utility  curve 
DD'  at  which  the  effort  curve  SS'  intersects  it.  Although  the 
curves  represent  independent  functions,  the  point  a  is  common 
to  both.  Although  utility  and  effort  are  independent  concepts, 
marginal  utility  is  not  independent  of  effort,  nor  is  marginal 
effort  independent  of  utility.  Every  attempt  to  establish  either 
of  the  two  theories  to  the  exclusion  of  the  other  betokens  a 
failure  to  trace  the  law  of  value  to  its  fundamental  premises 
mh). 

The  statement  that   value   is  <l('tennine(l   ])y   supply   and 


72  FUNDAMENTAL  CONCEPTS  [63 

demand  would  be  more  descriptive  of  the  actual  facts  if  ren- 
dered in  the  form  that  value  is  determined  by  cost  and  utility, 
conceiving  cost  to  denote  reluctance  to  exertion,  the  restraining 
force,  and  utility  to  denote  desire,  the  impelling  force.  As 
we  have  seen,  value  tends  to  become  adjusted  to  the  point 
where  the  desire  for  any  given  product  is  balanced  by  the 
reluctance  to  making  the  effort  of  producing  it  (58,  115,  123). 

The  lahor  or  cost  theory  is  incomplete  in  that  the  "quantity 
of  produce  required," — in  other  words,  the  quantity  demanded, 
— is  assumed  as  given,  while  it  should  really  be  traced  to 
ulterior  factors.  A  like  fault  is  to  be  found  with  the  utility 
theory,  which  assumes  the  "available  stock,"  in  other  words, 
the  quantity  supplied,  as  being  given.  Both  these  quantities 
vary  with  every  change  of  price,  and  being  thus  dependent 
on  price  they  cannot  be  regarded  as  primary  factors  in  the 
determination  of  price.  In  a  normal  market  both  are  equal 
to  the  amount  actually  produced,  and  this  amount  is  de- 
termined by  a  balancing  process  in  which  the  likes  and  dis- 
likes of  all  buyers  and  all  sellers  come  into  play.  Production 
proceeds  no  farther  than  where  desire  and  reluctance,  where 
impulse  and  restraint,  come  to  a  balance.  The  primary  factors 
to  which  value  is  to  be  traced  are  the  various  individual  evalua- 
tions. On  the  one  hand  is  the  diminishing  desire  for  the 
gratification  of  consumption,  which  we  have  represented  by  the 
curve  DD' ;  on  the  other  the  increasing  reluctance  to  make 
the  effort  of  production,  which  we  have  represented  by  the 
curve  88'.  It  is  only  by  showing  how  these  forces  combine  in 
determining  the  amount  demanded  and  the  amount  supplied 
that  the  law  of  value  is  traced  to  its  fundamental  factors.  In 
a  normal  market  these  two  quantities  are  equal,  as  are  also 
final  utility  and  marginal  cost,  hence  both  the  cost  and  the 
utility  theoiy  are  true  as  far  as  they  go. 

In  this  respect  a  possible  misapprehension  should  be 
guarded  against,  and  an  analog}^  may  be  helpful  to  that  end. 
"We  know  that  the  speed  of  a  steam  engine  is  regulated  by  its 
governor.  But  it  is  the  steam,  not  the  governor,  which  is  the 
cause  of  motion ;  the  governor  only  regulates  the  speed  by 
controlling  the  admission  of  steam.  So  is  utility  alone  the 
active  principle  of  value,  inasmuch  as  it  engenders  the  desire 


64]  VALUE  73 

for  things,  while  the  strain  of  labor,  the  cost,  is  that  which 
governs  the  quantity  produced  and  so  only  regulates,  but  does 
not  engender,  the  value  of  the  products. 

Since  the  labor  or  cost  theory  cannot  apply  to  things  that 
cannot  be  reproduced — for  instance,  paintings  of  old  masters 
— nor  to  a  commodity  of  which  the  marginal  cost  has  not  be- 
come equalized  with  final  utility  (221),  as  is  the  case  for  a  time 
with  things  the  production  of  which  is  facilitated  by  a  new 
invention,  it  is  final  utility  alone  which  determines  value  in 
such  cases. 

The  cost  theory'  is  applicable  only  to  staple  articles  and 
services,  and  then  only  under  normal  conditions  of  the  market. 
There  are  cases  in  which  the  utility  theory  is  quite  inapplicable, 
the  cost  theory  being  the  one  which  alone  applies  (64). 

The  notion  that  labor  is  a  measure  of  value,  as  enunciated 
by  Adam  Smith  (30fl),  although  corrected  by  Ricardo,  con- 
tinues to  be  quoted  in  the  incorrect  form,  which  is  to  the 
effect  that  the  value  of  things  is  determined  hy  the  amount  of 
labor  required  in  their  production  (164).  This  proposition 
was  indeed  adopted  by  Karl  ]\Iarx  as  the  basis  of  his  theory 
of  value.  But,  as  shown  by  Ricardo,  it  is  true  only  for  things 
produced  at  the  margin  of  production  and  is  accordingly  valid 
only  in  a  sense  so  limited  that  its  application  as  a  general 
economic  law  leads,  as  a  matter  of  course,  to  untenable  con- 
clusions. 

64.  Illustrations. — When  applied  to  special  cases,  the  dia- 
gram represented  in  Fig.  6  may  have  to  be  modified  so  as  to 
adapt  it  to  the  conditions  of  the  case. 

When  commodities  are  of  such  a  nature  that  they  do  not 
admit  of  indefinite  subdivision,  the  "curves"  will  assume  a 
step-like  form.  Should  we  desire,  for  example,  to  represent 
the  market  for  horses,  the  diagram  would  take  the  form  sug- 
gested in  Fig.  8,  in  which  each  step  represents  a  horse.  The 
conclusion  that  the  "point  of  intersection"  of  the  two 
"curves,"  namely,  the  stepped  lines  8S'  and  I) I)',  marks  the 
rate  toward  whicli  tlie  price  tends,  is  as  true  here  as  in  tlie 
case  of  continuous  curves.  However,  a  glance  at  the  diagram 
plaiidy  shows  that  the  "intersection"  is  not  a  point,  but  the 


74  FUNDAMENTAL  CONCEPTS  [64 

short  vertical  line  aa',  since  the  two  ' '  curves ' '  actually  coincide 
for  that  distance.  Supply  and  demand  will  therefore  balance, 
whether  the  price  of  horses  is  equal  to  qa  or  to  qa'  or  anywhere 
between.  In  this  case  the  price  is  really  indeterminate  be- 
tween the  points  a  and  a'. 

In  the  diagram  Fig.  8  only  a  small  number  of  units  is 
shown.  As  a  rule,  a  large  number  of  units  is  involved.  The 
step-like  elements  of  the  ' '  curves ' '  will  then  be  comparatively 
small  and  will  virtually  disappear  in  a  graphical  representa- 
tion. Continuous  curves  may  therefore  be  used  in  practically 
all  cases. 

We  have  seen  that  a  change  in  the  prevailing  price  of  a 
commodity  affects  both  its  supply  and  its  demand,  but  we  have 
not  yet  considered  the  extent  to  which  either  is  affected.  Were 
we  to  examine  the  behavior,  in  this  respect,  of  a  number  of 
commodities,  we  would  find  a  marked  difference  among  them. 
A  change  of  a  given  percentage  of  price  will  affect  the  supply 
and  demand  of  some  commodities  more  than  of  others.  Fur- 
thermore, a  like  change  of  prices  affects  the  supply  and  the 
demand  of  many  commodities  unequally.  There  are  things  of 
which  a  rise  or  fall  in  the  price  is  followed  by  a  considerable 
change  in  the  supply  and  no  great  change  in  the  demand,  and 
there  are  other  things  in  regard  to  which  the  opposite  is  true. 
In  the  case  of  some  things  we  meet  with  extreme  conditions. 
There  are  some  commodities  for  which  the  amount  demanded 
is  almost  entirely  independent  of  the  price,  and  there  are 
other  things  of  which  the  amount  supplied  remains  practically 
unaffected  as  the  price  changes. 

As  an  instance  of  the  first  kind  we  may  mention  certain 
drugs.  The  demand  for  any  one  of  them  is  due  to  the  prev- 
alence of  the  disorder  for  which  it  is  a  specific.  A  falling 
price  will  not  appreciably  increase  the  demand,  and  it  would 
require  a  considerable  rise  in  the  price  before  even  the  poorer 
patients  would  go  without  the  medicine.  There  is  competition 
only  among  those  who  supply  the  goods,  and  since  the  supply 
is  governed  by  the  cost  or  effort  of  production,  this  cost  de- 
termines the  value.  Diagram  Fig.  9  applies  here  and  shows 
that  it  is  the  cui've  SS'  which  in  the  main  decides  the  ordinate 
of  the  point  of  intersection   (63,  153).     While  in  ordinary 


65]  VALUE  75 

cases  it  is  immaterial  whether  we  measure  value  by  marginal 
utility  or  by  marginal  effort,  in  this  case  it  is  the  marginal 
effort  which  is  the  predominating  factor.  However,  the  quan- 
tity demanded  is  decided  principally  by  the  range  of  utility, 
represented  by  the  buyers'  price  limit  DD'. 

The  other  extreme  may  be  illustrated  by  certain  wines 
which  can  be  raised  only  in  certain  districts.  The  area  of  their 
cultivation  cannot  be  increased,  no  matter  how  high  the  price 
may  soar.  If  in  a  given  year  a  certain  number  of  gallons  of 
such  wine  is  produced  and  put  upon  the  market,  the  vintners, 
guided  by  past  experience,  aim  to  adjust  the  price  as  high  as 
possible  without  losing  the  chance  of  selling  their  entire  output, 
in  other  words,  "as  high  as  the  traffic  will  bear."  Were  they 
to  make  the  price  too  high,  they  could  dispose  of  only  a  portion 
of  their  product,  and,  if  too  low,  the  demand  would  exceed 
the  supply  and  they  would  find  that  a  higher  price  could  have 
been  obtained.  The  diagram  Fig.  10  graphically  illustrates 
the  case.  Value  is,  then,  regulated  principally  by  the  range 
of  utility  DD',  while  the  quantity  supplied  is  determined 
almost  entirely  by  the  limited  facilities  of  production,  depicted 
by  the  sellers'  price  limit  SS'. 

Some  writers,  Mill  among  them,  treat  these  extreme  eases 
as  though  they  were  subject  to  independent  laws  of  value, 
assigning  one  law  to  ''freely  reproducible  goods"  and  another 
to  "scarcity  goods."  Our  examination,  however,  shows  that 
this  dLstinction  is  immaterial,  as  both  cases  are  obedient  to  the 
same  law.  The  difference  in  the  application  of  the  law  is 
simply  due  to  a  difference  in  the  conditions  peculiar  to  each 
case. 

65.  Capitalized  Values. — Before  concluding  the  present 
discussion,  it  is  desirable  to  take  notice  of  a  class  of  values 
which  properly  belong  to  a  special  category.  In  this  we  are 
obliged  to  anticipate  some  matters  which  logically  relate  to  a 
later  section  of  our  investigation ;  we  have  to  take  account  of 
the  fact  that  money  has  the  power  to  command  interest. 

There  are  certain  kinds  of  property,  creat(>d  l)y  law  or  by 
private  contract  and  not  by  labor,  such  as  land  ownership, 
franchises,  special  privileges  and  annuities,  which  have  the 


76  FUNDAMENTAL  CONCEPTS  [65 

capacity  to  yield  a  continuous  or  periodic  income.  Property 
of  this  kind,  which  is  in  the  nature  of  a  right,  must  be  sharply 
distinguished  from  the  income  which  it  yields.  The  property 
itself,  the  right,  not  being  consumable,  cannot  be  considered  to 
have  "utility,"  and  not  being  the  product  of  labor,  it  cannot 
be  considered  to  have  "cost."  But  though  devoid  of  both 
utility  and  cost,  property  of  this  nature  is  marketable  and 
therefore  possesses  value. 

This  value  depends  upon  conditions  different  from  those 
which  regulate  the  value  of  consumable  things,  this  latter 
being  dependent  on  either  final  utility  or  marginal  cost,  both 
of  which  factors  are  absent  in  the  case  of  law-created  property. 
It  is  generally  recognized  that  the  bridge  between  the  value 
of  this  class  of  property  and  the  value  of  consumable  things  is 
money,  by  virtue  of  its  power  to  command  interest.  The  value 
of  money,  namely,  its  exchange  ability  with  commercial  com- 
modities, as  well  as  its  interest-commanding  quality,  will  be 
fully  discussed  in  their  proper  places.  But  it  is  through  its 
interest-bearing  quality  alone  that  money  can  be  compared 
with  law-created  rights  which  have  the  power  to  render  periodic 
incomes. 

It  is  easy  to  understand  that  a  right  to  a  perpetual  income 
from  any  source  will  normally  fetch  such  a  sum  of  money  as 
is  capable  of  returning  an  equal  net  income  in  the  form  of 
interest.  In  order  to  find  the  exchange  value  of  such  a  right, 
we  must  compute,  by  the  well-known  process  of  "capitalizing" 
the  income,  the  sum  of  money  which,  at  the  prevailing  rate  of 
interest,  would  bring  equal  returns  (181).  Thus,  an  income 
of  $100  per  year,  when  the  interest  rate  is  five  per  cent.,  has  a 
selling  value  of  $2000.  If  the  right  is  not  perpetual,  but 
limited  to  a  definite  period,  its  value  follows  certain  rules  of 
computation  which  are  well  known. 

It  is  often  asserted  that  a  thing  can  have  value  only  if  it  is 
capable  of  returning  an  income.  But,  as  we  have  seen  in  our 
foregoing  discussion,  the  value  of  things  produced  by  labor  is 
not  dependent  on  any  income-producing  power,  so  that  values 
determinable  by  the  process  of  capitalization  can  have  refer- 
ence only  to  rights  and  privileges,  but  not  to  things  produced 
by  labor  (360). 


CHAPTER  V 

CREDIT 

66.  The  Nature  of  Credit. — The  fact  that  instruments  of 
credit,  such  as  promissory  notes,  drafts,  certificates  of  stock, 
and  especially  paper  currency,  possess  exchange  value  has 
been  variously  interpreted.  Although  men  of  affairs,  like 
bankere  and  merchants,  who  have  to  deal  with  credit  in  prac- 
tice, have  substantially  correct  ideas  about  credit  instruments, 
the  theory  of  credit  remains  involved  in  a  maze  of  academic 
controversy  and  in  a  confusion  of  conflicting  ideas.  Before 
we  can  proceed  to  study  the  subject  intelligently,  we  must 
find  what  it  is  that  really  constitutes  "credit." 

Being  derived  from  the  Latin  word  ''credere/'  to  believe, 
''credit"  primarily  signifies  reputation  for  trustworthiness. 
The  reports  of  commercial  agencies  are  information  regarding 
such  credit.  The  term  has,  however,  come  to  be  used  in  another 
sense,  in  which  it  describes  the  relation  arising  when  com- 
mercial trust  has  been  given,  and  this  is  the  meaning  with 
which  economics  has  to  deal.  In  this  sense  "credit"  is 
equivalent  to  "claim,"  usually  a  claim  to  a  specified  sum  of 
money  payable  at  a  specified  future  time.  When  a  bookkeeper 
gives  "credit"  on  his  books  for  value  received,  he  really 
records  the  amount  the  creditor  has  a  right  to  claim  at  some 
future  time.  "Credit,"  then,  is  the  correlative  of  "debt," 
just  as  "creditor"  is  the  correlative  of  "debtor."  The  terms 
"credit"  and  "debt,"  accordingly,  denote  the  same  relation 
considered  from  opposite  standpoints.  Only  in  this  sense  can 
credit  be  regarded  objectively,  that  is,  as  something  valuable, 
as  something  wliich  can  be  bought  and  sold,  or  which  can  be 
conveyed  by  instruments  of  credit.  In  point  of  fact,  credit 
instruments  are  simply  acknowledgments  of  inde1)tednes.s. 

It  is  not  difficult  to  see  that  the  right  of  the  creditor  is 
closely  related  to  the  right  of  ownership.  In  some  respects 
both  rights  are  alike,  but  how  far  the  similarity  goes  can  best 
be  learned  by  first  stiulying  in  detail  the  several  features  which 
characterize  the  right  of  ownership. 

77 


78  FUNDAMENTAL  CONCEPTS  [67 

67.  The  Right  of  Ownership  Analyzed. — Since  the  right 
of  ownership  exists  by  virtue  of  the  social  guarantee  to  un- 
disputed possession  (21),  it  naturally  embraces  all  rights  that 
such  guarantee  implies.  The  owner  may  use,  change,  consume 
or  sell  that  which  he  owns,  unless  by  doing  so  he  injures  others. 
If  the  object  o^vned  is  one  that  is  capable  of  being  utilized  for 
an  indefinite  period,  ownership  includes  the  right  to  its  exclu- 
sive use  during  the  entire  period  of  its  existence. 

The  owner  of  a  thing  may  sell  it  entirely,  or  he  may  sell 
any  portion  of  his  right  to  it.  The  latter  happens,  for  in- 
stance, when  a  man  rents  a  house  to  a  tenant.  The  lease  is 
invariably  made  for  a  specified  period,  w^hich  may  or  may  not 
be  extended  after  the  expiration  of  the  term.  By  leasing  a 
property,  the  owner  really  sells  a  portion  of  his  right  to  its 
exclusive  use.  But  it  is  only  the  right  of  possession  and  use 
for  a  specified  time  that  he  sells;  he  retains  all  other  rights. 
After  making  such  a  partial  sale,  he  manifestly  is  no  longer 
owner  in  the  full  sense  of  the  word.  It  would,  instead,  be 
more  appropriate  to  call  him  "lessor."  Commonly,  a  lessee 
is  not  considered  joint  owner  of  the  leased  property,  but  from 
a  rational  standpoint  we  cannot  escape  the  conclusion  that 
the  sum-total  of  the  rights  comprised  in  ownership  is  actually 
shared  between  lessor  and  lessee,  and  that  the  case  is  really 
one  of  joint  ownership  in  a  qualified  form.  A  similar  relation 
exists  when  a  librarian  loans  a  book  to  an  applicant,  or  when 
the  owner  of  a  livery  hires  out  a  team  to  a  customer  for  a 
specified  time.  In  the  following  analysis  the  term  "lessor" 
will  be  used  to  denote  the  owner  of  anything,  the  possession 
of  which  he  has  temporarily  turned  over  to  another.  Although 
this  term  is  not  usually  understood  as  applying  to  all  cases 
where  an  owner  has  temporarily  parted  with  the  right  of 
possession  in  favor  of  another,  there  is  good  reason  for  giving 
the  term  this  broad  scope.  The  right  of  the  lessor  is  clearly 
a  phase  of  ownership  which  has  an  important  bearing  on  the 
study  of  credit. 

Leasing  is,  however,  only  one  of  the  methods  by  which  some 
part  of  an  owner's  rights  is  conveyed  to  another  person. 
There  are  other  ways  in  which  the  right  of  ownership  may 


68]  CREDIT  79 

be  shared  by  two  or  more  persons.  Things  may  be  jointly 
owned  in  specified  proportions.  This  applies  particularly  to 
certain  aggregates  of  things,  like  stores  of  goods,  manufactur- 
ing plants,  railroads  and  the  like.  Partners  share  the  owner- 
ship of  such  aggregates  of  things  in  definite  proportions.  In 
stock  companies  the  property  is  owned  in  shares  by  the  stock- 
holders. Each  partner,  each  stockholder,  is  owner  of  an 
aliquot  part  of  the  whole. 

All  forms  of  joint  ownership  are  subject  to  dissolution, 
either  by  special  agreement  or  under  the  provisions  of  law. 
Partnerships  are  generally  entered  into  for  stated  periods. 
"While  the  agreement  is  in  force,  none  of  the  partners  has  a 
right  to  either  use,  change,  consume  or  sell  any  portion  of  the 
property  jointly  owned,  except  for  and  in  behalf  of  the 
partnership.  Inasmuch  as  the  right  of  each  partner  to  the 
possession  of  his  share  is  for  the  time  surrendered  to  the 
partnership,  which  figures  as  a  separate  economic  person  (16), 
we  must  regard  each  partner  as  lessor  of  his  respective  share 
rather  than  as  owner.  At  the  expiration  of  the  term  of  the 
partnership  any  one  of  the  members,  having  complied  with 
the  necessary  formalities,  may  insist  upon  dissolution  and  the 
recovery  of  his  portion.  If  the  partners  cannot  agree  upon 
some  other  method  of  division,  any  one  of  them  can  legally  in- 
sist on  the  public  sale  of  the  property  and  the  sharing  of  the 
proceeds. 

68.  Credit  Defined. — The  right  of  the  creditor  exists  by 
virtue  of  law  which  empowers  him  to  take  certain  action  in 
the  event  of  the  debtor  failing  or  refusing  to  pay  the  debt 
when  it  matures.  In  that  event  the  property  of  the  debtor 
can  be  legally  seized  and  sold  at  public  sale,  and  the  proceeds 
applied  to  pay  the  cost  of  the  legal  process  and  the  claim  of 
the  creditor,  the  remainder  being  returned  to  the  delinquent. 
Before  the  debt  matures,  the  right  of  the  creditor  is  analogous 
to  that  of  a  lessor,  since  he  has  no  right  to  demand  possession 
of  that  to  which  he  has  only  an  ultimate  claim ;  but  after  the 
debt  falls  due,  if  it  be  not  paid,  the  creditor  can  legally  insist 
on  the  puhlic  sale  of  the  property  of  the  debtor  and  the  sharing 
of  the  proceeds. 


80  FUNDAMENTAL  CONCEITS  [68 

By  comparing  this  right  with  that  of  a  partner,  it  is  seen 
that,  with  the  difference  of  a  few  minor  details,  the  right  of 
the  creditor  is  identical  with  that  of  a  partner  or  joint  owner 
(210).  The  main  difference  appears  in  the  division  of  the 
proceeds.  Instead  of  these  being  divided  pro  rata  among  the 
partners,  they  are  so  divided  that  the  creditor  obtains  the 
amount  due  him,  while  the  debtor,  who  was  the  reputed  owner 
of  the  property  sold,  retains  only  the  remainder. 

If  it  is  appropriate  to  regard  partners  as  joint  owners  of 
the  property  of  the  partnership,  it  is  manifestly  equally  ap- 
propriate to  consider  creditor  and  debtor  as  joint  owners  of 
the  possessions  of  the  debtor,  the  sole  difference  being  that  the 
creditor,  instead  of  owning  an  aliquot  portion  of  the  whole, 
owns  a  definite  portion  equal  in  value  to  the  amount  of  his 
credit.  His  share  is  stated  in  a  definite  number  of  dollars, 
while  that  of  a  partner  is  a  stated  fraction  of  the  aggregate 
property  of  the  partnership. 

In  view  of  this  difference,  the  process  of  terminating  the 
joint  ownership  of  debtor  and  creditor  varies  in  a  few  par- 
ticulars from  that  of  dissolving  a  regular  partnership.  By 
his  promise  to"  pay  a  certain  sum,  the  debtor  really  agrees  to 
dissolve  the  joint  ownership  at  the  time  specified  by  buying 
the  creditor's  share,  the  value  of  which  is  stated  in  the  agree- 
ment. But  if  the  debtor  fails  to  make  this  purchase,  the 
creditor  can  dissolve  the  joint  ownership  by  selling,  through 
legal  process,  enough  of  the  debtor's  possessions  to  liquidate 
the  claim. 

In  view  of  the  creditor's  right  being  virtually  a  form  of 
joint  ownership  of  the  wealth  possessed  by  the  debtor,  "credit" 
may  be  defined  as  ownership  without  possession,  or,  to  state  it 
otherwise,  joint  ownership  of  wealth  to  which  the  debtor  has, 
for  the  time  being,  the  exclusive  right  of  possession ;  and  con- 
versely, ' '  debt ' '  as  possession  without  ownership,  or,  possession 
of  wealth  which  is  really  owned,  at  least  in  part,  by  the 
creditor  (21,  102,  299).  We  must,  however,  constantly  bear 
in  mind  that  before  the  debt  falls  due  the  creditor  is  only 
lessor  and  not  full  owner  of  his  share,  in  other  words,  that 
the  right  of  possession  is  held  for  a  stated  time  by  the  debtor. 


69]  CREDIT  81 

According  to  this  reasoning  a  debtor  is  only  the  nominal 
or  reputed  owner  of  those  of  his  possessions  which  are  subject 
to  seizure  for  any  debt.  The  creditor  owns  a  share  equal  to 
the  debt,  while  the  debtor  really  owns  the  remainder  only. 
Moreover,  a  debtor,  whose  debts  equal  the  value  of  all  his  pos- 
sessions, although  nominally  owning  all,  in  reality  owns  no 
portion  of  that  which  he  possesses,  and  furthemiore,  if  the 
nominal  amount  of  his  debts  exceeds  the  value  of  his  pos- 
sessions, the  real  value  of  the  corresponding  credits  is  below 
par,  being  equal  to  no  more  than  the  actual  value  of  those 
possessions. 

In  the  event  of  a  third  party  going  surety  for  a  debtor, 
the  amount  of  wealth  subject  to  seizure  is  increased  and  the 
creditor  becomes  conditional  part  owner  of  the  possessions  of 
the  surety. 

69.  Three  Forms  of  Credit. — Ownership  can  be  shared  in 
more  than  one  w^ay.  The  principal  forms  of  division  are  (1) 
between  lessor  and  lessee,  (2)  among  partners  or  stockholders, 
and  (3)  between  creditor  and  debtor.  In  the  first  form  of  divis- 
ion the  lessor  retains  all  rights  with  the  exception  of  possession 
and  use  for  a  specified  period,  this  right  being  held  bj^  the 
lessee.  In  the  second  form  the  several  joint  owners  share  the 
right  in  specified  proportions,  their  respective  shares  being 
fractional  parts  of  the  value  of  the  aggregate  property.  In  the 
third  form  the  creditor  owns  a  certain  portion,  the  value  of 
which  is  expressed  in  terms  of  some  commodity  or  service, 
usually  in  terms  of  the  conventional  value  unit,  while  the 
debtor  owns  the  remainder.  Partners,  however,  like  creditors, 
are  really  in  the  position  of  lessors  as  long  as  the  partnership 
continues  or  the  debt  has  not  matured,  and  this  is  true 
whether  the  debt  is  payable  on  a  stated  day,  or  on  demand, 
or  at  a  time  otherwise  determined. 

The  term  "credit"  is  generally  applied  only  to  the  third 
one  of  these  three  forms  of  divided  ownership,  but  the  essen- 
tial similarity  of  all  three  forms  is  more  significant  than  their 
actual  differences.  Because  of  this  essential  similarity  all 
forms  of  ownership  without  possession  are  in  reality  merely 
different  forms  of  "credit"  and  are  here  considered  under 

6 


82  FUNDAMENTAL  CONCEPTS  [69 

that  head.  The  fii-st  and  third  forms  differ  only  in  this:  in 
the  first,  the  identical  object  of  the  loan,  in  the  third  only  an 
equivalent  thereof  is  to  be  returned.  The  lessee  of  a  house 
must  return  the  identical  house  leased,  the  borrower  of  money 
need  only  return  an  equivalent  sum  of  money.  In  all  other 
respects  debtor  and  lessee  are  on  the  same  footing.  As  regards 
the  second  form,  a  certificate  of  stock  is  to  all  intents  and 
purposes  a  credit  instrument,  being  an  evidence  of  ownership 
of  wealth  in  possession  of  others. 

In  view  of  the  fact  that  credit  is  ownership  without  pos- 
session, and  that  the  property  of  a  debtor  is  owned  by  the 
creditor  and  the  debtor  conjointly,  it  is  manifest  that  the 
value  of  this  property  is  likewise  divided  into  two  parts,  one 
being  owned  by  the  creditor,  the  other  by  the  debtor.  The 
share  owned  by  the  creditor,  if  expressed  in  terms  of  dollars, 
presents  a  feature  which  is  worthy  of  special  note.  While 
the  value  of  the  entire  property,  expressed  in  dollars,  may 
fluctuate,  that  portion  of  the  property  which  is  owned  by  the 
creditor  is  not  subject  to  such  fluctuation.  Barring  the  ele- 
ments of  discount  and  risk  (76),  this  share  remains  at  par 
with  the  standard  of  value.  Whatever  fluctuation  may  ensue 
in  the  value  of  the  property  falls  on  the  share  owned  by  the 
debtor.  A  rise  in  the  value  benefits  him  alone,  just  as  a  fall 
in  value  must  be  borne  by  him.  Credit,  therefore,  if  expressed 
in  dollars,  or  whatever  the  conventional  unit  may  be,  is  a 
value-magnitude  which,  though  related  to  and  derived  from 
wealth  of  variable  value,  is  nevertheless  stable,  at  least  in  the 
sense  in  which  the  value  of  the  standard  metal  gold  is  regarded 
as  being  stable.  This  is  the  fundamental  reason  ivJiy  credit  is 
just  as  well  adapted  as  gold  for  use  as  money  (88,  95,  115, 
125,294). 

The  ownership  theory  of  credit  is  by  no  means  new.  It  is 
indeed  the  theory  of  common  law.  The  creditor  who  is  se- 
cured by  mortgage  is  legally  a  conditional  purchaser  of  the 
property.  The  banker,  when  called  upon  for  a  loan,  informs 
himself  as  to  what  the  property  of  the  applicant  would  bring 
at  a  public  sale.     He  Imows  that  by  lending  he  acquires  a 


70]  CREDIT  83 

conditional  right  to  have  this  property  sold,  a  right  which 
primarily  belongs  to  the  owner.    According  to  MacLeod : 

Credit  is  a  right  of  action  against  a  person  to  pay  or  to  do  some- 
thing " 

and  a  right  of  action,  in  this  respect,  embraces  the  right  to 
have  the  debtor's  possessions  sold  by  legal  process  if  he  fails 
to  pay. 

70.  Divergent  Conceptions  of  Credit. — Although  this 
ownerehip  conception  of  credit  is  the  prevailing  one  in  the 
practical  world  and  affords  a  valid  basis  for  further  con- 
clusions, various  other  definitions  of  the  term  "credit,"  which 
are  at  variance  with  this  idea,  are  more  or  less  authoritatively 
propounded. 

It  is  often  held  that  credit  owes  its  value  to  wealth  to  be 
produced  or  services  to  be  rendered  in  the  future.  This  view 
is  apparently  corroborated  in  many  ways,  for  example,  in  the 
fact  that  some  credit  tokens,  like  railroad  and  theatre  tickets, 
are  redeemable  in  services  which,  in  the  nature  of  things, 
must  be  rendered  after  the  tokens  are  sold.  But  if  the  issuer 
of  such  tokens  fails  to  redeem  them,  the  holder's  final  recourse 
is  to  legal  process,  terminating,  if  need  be,  in  the  sale  of  the 
delinquent's  possessions  to  the  extent  of  the  stated  value  of 
the  tokens.  Not  the  future  service,  but  the  existing  posses- 
sions of  the  issuer,  constitute  the  substance  of  the  credit. 

According  to  another  conception,  of  which  MacLeod  is  the 
most  consistent  exponent,  credit  is  a  form  of  wealth,  included 
in  the  class  of  "rights,"  which  is  created  whenever  a  debt  is 
contracted.  After  describing  how  the  Royal  Bank  of  Scotland, 
in  the  eighteenth  century,  issued  and  loaned  its  notes  to  cus- 
tomers for  whom  others  became  surety,  this  writer  continues: 

Now  we  observe  that  all  these  Cash  Credits  which  have  produced 
such  marvellous  results  are  purely  in  the  nature  of  Accommodation 
l^aper.  .  .  .  Thus  we  have  an  enormous  mass  of  exchangeable 
Troperty  created  by  the  mere  will  of  the  Bank  and  its  customers  which 
produced  all  the  solid  effects  of  actual  gold  and  silver,  and  when  it  has 
done  its  work,  it  vanishes  again  into  Nothing  at  the  will  of  the  same 

"Macl^od,  I,  p.  220. 


84  FUNDAMENTAL  CONCEPTS  [71 

persons  who  called  it  into  existence.  Hence  we  see  that  the  mere  will 
of  man  has  created  vast  masses  of  Wealth  out  of  Nothing:  and  then, 
having  served  their  purpose,  were  Decreated  into  Nothing.^* 

We  shall  see  later  (123)  that  this  view,  erroneous  as  it  is, 
is  far  more  prevalent  than  is  generally  supposed,  especially 
when  applied  to  those  credit  instruments  which  constitute  cur- 
rency. If  the  owner  of  a  house  rents  it  to  a  tenant,  nobody 
would  say  that  a  second  house  is  thereby  created,  the  owner 
owning  one  house  and  the  tenant  occupying  one,  making  two. 
Yet  the  reasoning  of  MacLeod  and  others  is  tantamount  to 
such  an  inference.  The  value  of  a  credit  instrument  is  really 
the  value  of  that  fraction  of  the  possessions  of  the  debtor  or  his 
surety  which  is  owned  by  the  creditor.  We  must  be  careful 
not  to  confuse  the  nominal  with  the  real,  nor  possession  with 
ownership. 

71.  "  Possession  "  Versus  "  Ownership." — Failure  to 
properly  discern  between  "possession"  and  " ownership"  has 
given  rise  to  a  singular  controversy.  While  most  economists 
hold  that  the  delivery  of  goods  by  A  to  B  in  exchange  for  a 
promissory  note  is  virtually  only  half  an  exchange,  the  other 
half  being  effected  in  the  future,  namely,  when  B  pays  the 
note,  others  hold,  on  the  contrary,  that  an  exchange  of  goods 
for  a  promissoiy  note  constitutes  a  complete  exchange,  the 
note  being  an  economic  quantity  of  a  value  equal  to  the  goods 
delivered.    Thus,  for  instance,  MacLeod  says: 

Now,  when  a  merchant  makes  a  purchase  with  his  Credit,  it  is  not 
a  "  loan  "  of  Capital  .  .  .  :  it  is  an  absolute  Sale;  just  as  much  as 
if  the  purchase  had  been  effected  with  money." 

It  would  seem  that  only  one  of  these  views  can  be  correct. 
But,  as  a  matter  of  fact,  both  are  correct  in  their  way,  for 
they  are  taken  from  different  standpoints.  If  the  question 
of  exchange  is  viewed  in  a  physical  aspect,  from  the  stand- 
point of  possession,  the  delivery  of  goods  by  A  for  a  promise 
of  payment  by  B  is  undoubtedly  an  incomplete  transaction, 
or  half  an  exchange.  The  other  half  is  not  even  accomplished 
when  the  promise  is  redeemed  by  the  payment  of  the  note,  for 

"MacLeod,  I,  p.  402.  "Ibid.,  I,  p.  288. 


72]  CREDIT  85 

the  ultimate  exchange,  that  of  goods  for  goods,  is  only  com- 
pleted, so  far  as  A  is  concerned,  when  he  uses  the  money  so 
received  in  the  purchase  of  goods.  MacLeod's  position  is, 
however,  correct  if  the  transaction  is  viewed  in  its  other  aspect, 
namely,  from  the  standpoint  of  the  right  of  ownership.  As 
soon  as  A  delivers  the  goods  he  acquires  a  claim  against  B 
equal  to  the  value  of  the  delivered  goods,  and  by  virtue  of 
that  claim  becomes  joint  owner  in  B's  possessions.  A  has 
simply  exchanged  his  right  to  the  goods  delivered  for  an  equal 
right,  as  joint  owner  or  joint  lessor,  to  the  possessions  of  B. 
He  is  no  poorer  by  accepting  the  note — assuming  it  to  be  valid 
— than  he  would  be  had  he  received  equivalent  payment  in 
money. 

72.  The  Substance  of  Credit. — A  credit,  conceived  as  the 
correlative  of  a  debt,  derives  its  value  from  the  particular 
wealth  which  is  subject  to  seizure  and  sale  if  the  debt  is  not 
paid  on  time.  When  a  credit  is  created,  or,  viewing  the 
transaction  from  the  opposite  standpoint,  when  a  debt  is  con- 
tracted, the  debtor  yields  to  the  creditor  a  certain  right  to  his 
possessions.  In  the  case  of  some  loans  a  portion  of  the  wealth 
of  the  debtor  is  actually  placed  as  security  in  custody  of  the 
creditor,  who  does  not,  however,  thereby  acquire  the  right  to 
use  this  pledge.  The  value  of  such  a  pledge  usually  exceeds 
the  value  of  the  loan,  and,  in  case  of  non-payment  of  the 
debt  when  due,  the  creditor  may  sell  this  security  to  reimburse 
himself.  In  the  case  of  a  mortgage  the  creditor  obtains  the 
right  to  attach  certain  specified  property,  against  which  the 
claim  is  recorded,  while  the  property  itself  remains  in  pos- 
session of  the  debtor  with  the  full  right  to  use  and  even  to  sell. 
But  if  the  debtor  does  sell  the  property,  the  right  of  the 
creditor  to  attach  and  sell  it  for  the  debt  remains  in  force. 
When,  however,  no  part  of  the  debtor's  wealth  is  particularly 
specified,  then  anything  nominally  owned  by  him  may  be 
attached  and  therefore  constitutes  that  which  during  the  con- 
tinuance of  the  debt  must  be  considered  as  being  jointly 
owned  by  both  debtor  and  creditor,  but  which,  for  the  time, 
the  delator  has  the  exclusive  right  to  use.  The  ivealth  subject  to 
legal  claim  is  the  substance  of  credit. 


86  FUNDAMENTAL  CONCEPTS  [73. 74 

This  explanation  of  the  source  from  which  credit  derives  its 
value  might  be  questioned  on  the  ground  that  loans  are  fre- 
quently made  where  there  are  no  possessions  on  which  to  base 
the  value  of  the  corresponding  credit,  but  which  yet  are 
ultimately  made  good  through  subsequent  efforts  of  the  debtor. 
Such  loans,  however,  are  obviously  not  business  transactions 
in  the  true  sense.  They  are  in  the  nature  of  ventures  or  of 
acts  of  consideration  or  of  friendship.  Obligations  of  this 
nature  have  usually  no  definite  value,  and  if  they  are  made 
good  in  the  end,  all  that  can  be  said  is  that  the  risk  assumed 
by  the  lender  turned  out  in  his  favor. 

73.  Superposed  Credits. — When  stocks,  bonds,  warehouse 
receipts,  and  the  like  are  given  as  collateral  to  secure  loans,  it 
would  seem,  at  first  glance,  that  these  loans  are  not  secured  by 
actual  wealth,  since  the  collaterals  are  paper.  But  the  value 
of  these  collaterals  depends  on  the  existence  of  some  concrete 
wealth  in  the  possession  of  somebody  who  does  not  really  own 
it.  The  credit  so  assured,  then,  is  in  the  nature  of  a  super- 
posed credit.  Credit  instruments  are  fully  competent  to  be 
used  as  "security"  or  "pledges"  for  further  credit.  That 
upon  which  the  claim  is  founded  may  be  traced  from  obliga- 
tion to  obligation,  but  ultimately  the  trail  must  end  in  some 
existing  concrete  wealth  to  which  the  claim  applies.  While 
in  the  case  of  loans  the  pledges  placed  in  the  hands  of  the 
lenders  usually  consist  of  paper  evidences,  like  promissory 
notes,  bonds,  stocks,  and  so  forth,  the  material  wealth  which 
directly  or  indirectly  underlies  these  paper  evidences  is  the 
real,  the  material  security  of  the  loans.  Practically  our  entire 
monetary  system  is  one  vast  complex  of  credit  superposed 
upon  credit  (100,  102). 

74.  Public  Credit. — The  theory  that  credit  must  be  founded 
on  tangible  property  subject  to  legal  seizure  is  also  true  when 
applied  to  public  debts,  be  they  federal,  state,  or  municipal. 
It  is  true  that  no  court  could  issue  a  writ  of  attachment  against 
post-offices,  warships,  or  forts,  but  the  resources  of  a  govern- 
ment are  not  limited  to  such  things.  Viewed  as  a  corporate 
representative  of  the  people,  the  government  renders  services 
to  them  and  receives  from  them  payment  for  these  services  in 
the  form  of  taxes.    If  a  government  borrows,  it  does  so  be- 


75]  CREDIT  87 

cause  the  cost  of  the  services  performed,  ostensibly  for  the 
benefit  of  the  people,  exceeds  the  compensation  given  by  the 
people  for  the  services — in  other  words,  because  the  taxpayers 
are  nominally  getting  more  than  they  give.  They  are  the 
real  debtors  in  the  case  of  public  debts.  They  are  paying  the 
interest  on  these  debts  and  are  expected  to  pay  the  principal 
in  the  end.  For  non-payment  of  taxes  their  property  is  sub- 
ject to  legal  seizure,  and  since  the  power  of  government  to 
impose  and  collect  taxes  can  be  limited  only  by  rebellion,  it  is 
evident  that  the  taxable  wealth  of  citizens  constitutes  the 
security  of  public  debts. 

75.  The  Value  of  Credit.— While  credit  derives  its  value 
from  the  wealth  which  secures  it,  the  amount  of  this  value  is 
fixed  by  the  terms  or  specification  of  the  debt.  This  specifica- 
tion must  needs  be  rendered  in  terms  of  some  commodity  or 
service,  for  debt  can  be  extinguished  only  by  the  delivery  of 
some  actual  wealth  or  service,  the  kind  and  amount  of  which 
is  stated.  This  must  not  be  misunderstood.  In  the  course  of 
business  routine  debts  are  usuallj'  paid  by  means  of  credit 
instruments,  like  bank  notes  or  checks,  but  by  such  payment 
the  creditor's  claim  is  not  extinguished;  it  is  merely  shifted 
from  one  debtor  to  another  (95,  341). 

When  debts  are  expressed  in  dollars,  they  are  virtually 
expressed  in  terms  of  gold.  This  does  not  preclude  the  fact 
that  some  obligations  have  other  denominations.  For  example, 
some  farming  rents  are  payable  in  agricultural  products.  In 
the  produce  exchange  obligations  are  contracted  for  the  de- 
livery, on  certain  dates,  of  specified  quantities  of  cotton, 
wheat,  or  other  products.  Some  instruments,  like  railroad 
tickets,  are  redeemable  in  services.  These  obligations  do  not 
differ  in  principle  from  money  debts.  The  value  of  all  credit 
instruments  is  defined  by  the  terms  of  the  promise  of  their 
payment,  whether  gold  or  other  commodities  or  services  be 
specified.  It  also  follows  that  the  market  value  of  such  credit 
is  subject  to  the  same  fluctuations  as  that  of  the  commodity 
or  service  promised. 

When  prices  in  general  rise,  the  purchasing  power  of  a 
credit  expressed  in  terms  of  dollars  naturally  falls  in  the  same 


88  FUNDAMENTAL  CONCEPTS  [76 

proportion  as  the  purchasing  power  of  a  dollar.  The  chances 
of  a  fall  in  value  are,  however,  generally  speaking,  balanced 
by  equal  chances  of  a  rise,  so  that  on  this  score  a  creditor  is 
just  as  likely  to  gain  as  to  lose. 

76.  Depreciated  Credit. — While  the  nominal  value  of  a 
credit  equals  the  value  of  that  which  is  promised,  the  market 
value  is  generally  below  this  amount.  There  are  two  elements, 
namely,  charge  for  the  service  of  lending  and  the  presence  of 
risk,  which  have  the  effect  of  lowering  the  present  value  of  a 
credit  below  its  ultimate  value  (69,  112).  Ordinarily,  a  credit 
has  full  value  only  at  the  moment  it  falls  due,  and  then  only 
if  the  promise  is  promptly  fulfilled. 

A  creditor  or  lender  really  sells,  for  the  time  of  the  loan, 
the  right  to  the  use  of  the  thing  or  things  loaned,  and,  as  a 
matter  of  course,  he  receives  a  consideration  in  return.  This 
recompense  is  known  as  "interest"  if  the  subject  of  the  loan 
is  money,  and  as  "hire"  or  "rent"  if  it  is  something  else, 
such  as  a  motor  car,  a  farm,  a  house.  How  this  recompense 
is  determined  in  the  market  will  be  discussed  further  on 
(252-258). 

If  the  interest  on  a  loan  of  money  is  paid  in  advance,  as  in 
the  case  of  a  discounted  note,  the  debtor's  promise  to  pay  is 
limited  to  the  amount  of  the  principal,  and  the  value  of  such 
a  promise  before  the  time  of  its  maturity  is  obviously  the 
face  value  less  the  interest  for  the  unexpired  term.  But  if,  on 
the  other  hand,  the  interest  remains  to  be  paid,  the  promise 
really  includes  the  interest  in  addition  to  the  principal  of  the 
loan.  Thus  the  total  sum  actually  promised  in  the  case  of  a 
$1000  twenty-year  four  per  cent,  bond  is  $1800.  Although 
such  a  bond  may  at  any  time  be  above  par,  its  value  is  always 
less  than  the  amount  of  principal  plus  the  interest  remaining 
to  be  paid.  Whether  interest  on  a  loan  is  paid  in  advance  or 
later,  the  fact  remains  that  the  value  of  a  credit  at  any  time 
is  less  than  the  total  amount  yet  to  be  paid  on  it.  The  differ- 
ence is  dependent  on  the  length  of  its  unexpired  term  and 
on  the  current  rate  of  interest.  At  a  later  stage  of  our  inquiry 
(139)  we  shall  see  that  interest,  like  hire,  comprises  several 
different  forms  of  recompense. 

That  reduction  of  the  value  of  a  debt  below  its  ultimate 


76]  CREDIT  89 

value  which  is  due  to  discount  at  interest  rate  is  not  regarded 
as  depreciation.  This  term  is  used  to  designate  a  lessening 
of  value  owing  to  risks  entailed  through  one  or  more  of  various 
contingencies.  A  few  of  the  latter  may  here  briefly  be  con- 
sidered. 

So  far  our  reasoning  has  proceeded  on  the  assumption  that 
if  a  credit  is  to  equal  the  promised  amount,  less  current  dis- 
count, it  must  be  secured  by  wealth  fully  covering  this  value. 
If,  however,  this  is  not  the  case,  or  if  there  is  some  possibility 
that  the  security,  though  adequate  at  first,  may  become  insuffi- 
cient by  the  time  the  debt  matures,  the  corresponding  credit 
will  of  course  be  below  par. 

Another  factor  which  often  affects  the  value  of  a  credit 
instrument  is  the  integrity  or  reputation  of  the  debtor.  If 
there  is  a  doubt  that  a  debt,  when  due,  will  be  promptly  paid, 
the  credit  instrument  will  be  more  or  less  depreciated  below 
its  nominal  value  (96).  On  the  other  hand,  a  reputation  for 
prompt  payment  sustains  the  normal  value  of  credit,  and  in 
the  case  of  a  debt  based  on  inadequate  security  the  belief  that 
the  debtor  will  sooner  or  later  pay  the  debt  may  balance,  at 
least  in  part,  such  depreciation  as  is  due  to  a  present  short- 
coming of  the  security. 

All  these  and  similar  factors  of  risk  exert  a  modifying 
effect  on  the  fundamental  proposition  that  the  market  value 
of  a  credit  equals  its  face  value  if  the  security  is  adequate  or, 
if  it  is  not  adequate,  that  the  market  value  of  the  credit  is 
determined  by  the  value  of  the  available  security.  The  gen- 
eral repute  of  the  debtor,  so  universally  an  element  in  the 
value  of  credit,  is  for  that  reason  too  often  mistaken  for  the 
essential  element,  while  in  reality  it  is  only  one  feature  of  the 
risk  factor  modifying  the  fundamental  proposition. 

Before  concluding  this  analysis  of  the  value  of  credit, 
allusion  should  be  made  to  a  class  of  credits,  principally 
represented  by  legal-tender  currency,  on  which  the  debtor  does 
not  pay  interest,  but  which  nevertheless  are  universally  ac- 
cepted without  a  deduction  for  discount  (95),  and  which 
become  depreciated  only  if  the  ultimate  payment  in  full 
becomes  questionable 


CHAPTER  VI 

MONEY 

77.  Misconceptions  Regarding  Money. — The  subject  of 
"money"  has  been  discussed,  extensively  and  intensively,  from 
the  time  of  the  classic  philosophers  down  to  the  present  day. 
It  has  been  studied  and  analyzed  from  almost  every  possible 
standpoint  and  presented  in  endless  variety  of  form.  But  the 
various  attempts  to  explain  the  power  which  money  has  had 
since  time  immemorial,  a  power  out  of  all  proportion  to  its 
economic  function,  have  only  tended  to  involve  the  subject  in 
irreconcilable  contradictions. 

Many  writers  have  unduly  complicated  the  subject  by  in- 
troducing into  its  discussion  matter  that  has  no  place  in  it. 
Instead  of  presenting  a  sharp  and  clear-cut  definition  of 
money,  they  have  endeavored  to  explain,  not  what  it  is,  but 
what  it  does,  at  the  same  time  ascribing  to  money  a  number 
of  functions,  most  of  which  are  not  in  reality  performed  by  it.^" 
The  cardinal  function  of  money  is  thereby  confused  with  ex- 
traneous matter  and  is  treated  as  of  secondary  importance, 
instead  of  being  made  the  basis  on  which  the  theory  of  money 
really  rests. 

78.  Money  Not  a  Value  Denominator. — Among  other 
things,  money  is  said  to  be  a  measure  or  standard  of  value,  a 
value  denominator.  This  is  in  conflict  with  what  we  have 
already  said  on  the  matter.  We  have  treated  the  subject  of  the 
value  unit  (28-32)  without  the  need  of  referring  to  money. 
The  fact  that  some  money  is  made  of  gold,  a  metal  which, 
from  among  other  commodities,  has  become  selected  as  our 
value  denominator,  does  not  justify  the  substitution  of  the 
idea  "money"  for  the  idea  "gold"  in  the  definition  of  the 
value  unit  "dollar."  "We  cannot  say  that  a  dollar  consists 
of  23.22  grains  of  pure  money  (115).  If  it  were  true  that 
money  is  the  measure  of  value,  then  gold  could  not  also  be  the 
measure,  as  these  terms  are  not  synonymous,  even  though  they 

'»C/.  Mill,  II,  pp.  17-24;   Perry,  pp.  188-276;   Walker,  pp.  1-23; 
Conant,  1,  pp.  20-21. 
90 


79]  MONEY  91 

are  often  used  interchangeably  in  colloquial  language.  More- 
over, not  all  money  is  made  of  gold.  Most  of  it  consists  of 
credit  which  can  be  commensurate  with  dollars  only  if  its 
denomination  is  in  terms  of  dollars.  Confusion  is  inevitable 
unless  we  divest  ourselves  of  the  notion  that  money  is  a  de- 
nominator of  value.  We  cannot  express  the  value  of  thing's 
in  terms  of  ' '  money ' '  any  more  than  we  can  express  the  height 
of  a  steeple  in  terms  of  "dry  goods." 

79.  "  Dollar "  Does  Not  Mean  "  Money."— The  indis- 
criminate use  of  the  tei-m  ' '  dollar, ' '  both  in  the  sense  of  '  *  value 
unit"  and  that  of  "medium  of  exchange,"  is  largely  respon- 
sible for  this  confusion.  It  is  clear  that  a  dollar  note,  w^hich 
merely  bears  a  promise  to  pay  a  dollar,  cannot  actually  be  a 
"dollar"  (95a),  although  it  is  currently  regarded  as  such.  In 
accurate  language  the  word  "dollar"  should  always  be  con- 
fined to  the  meaning  of  "value  unit." 

When  speaking  of  "one  hundred  apples"  we  invariably 
mean  one  hundred  individual  fruits,  while  the  phrase  "one 
hundred  dollars"  does  not  refer  to  the  number  of  pieces,  but 
is  descriptive  of  a  sum  or  quantity  of  money  worth  one 
hundred  units  of  value,  it  matters  not  whether  it  be  a  single 
one-hundred-dollar  note  or  any  number  of  notes  and  coins  of 
lower  denomination  adding  up  to  that  amount.  Moreover, 
"dollar"  is  often  used  to  specify  an  amount  of  wealth  figured 
at  so  many  units  of  value.  A  man  who  is  "worth"  many  thou- 
sands of  dollars  may  not  have  at  his  command  a  sum  of  money 
worth  one  hundred  dollars.  A  given  number  of  dollars  simply 
designates  the  number  of  value  units,  not  the  number  of  pieces 
of  money.  The  analogy  between  "dollar"  on  the  one  hand, 
and  other  units,  such  as  "yard,"  "pound,"  or  "gallon,"  on 
the  other,  is  obvious. 

Similarly,  the  word  "cent"  designates  the  one-hundredth 
part  of  one  dollar  and  may  only  at  times  be  used  incidentally 
to  denote  a  "penny."  A  payment  of  ten  cents  may  be  made 
with  a  single  dime,  A  manufacturer,  after  completing  a  con- 
tract for  10,000  pieces  of  a  certain  article,  at  the  price  of  ten 
cents  each,  would  probably  refuse  to  accept  payment  if  the 
customer  were  to  interpret  "cent"  as  meaning  the  coin  and 
tender  100,000  "pennies"  in  payment. 


92  FUNDAMENTAL  CONCEPTS  [79 

The  terms  ''dollar,"  ''shilling,"  "franc,"  although  gener- 
ally, and  for  obvious  reasons,  used  in  expressing  quantities  of 
money,  are  words  which  must  not  be  regarded  as  synonymous 
with  "money"  (95&).  There  is  probably  no  single  cause  so 
prolific  of  error  and  confusion  in  the  discussion  of  monetary 
matters  as  this  failure  to  sharply  distinguish  "dollar"  from 
' '  money. ' '  The  relation  of  ' '  dollars  "  to  "  money ' '  is  analogous 
to  that  of  "yards"  to  "dry-goods."  Just  as  we  cannot  con- 
ceive a  specific  quantity  of  dry-goods  without  reference  to 
some  yard-stick,  so  we  cannot  think  of  a  specific  sum  of  money 
without  reference  to  some  unit  of  value,  such  as  ' '  dollar. ' '  And 
as  "yard"  is  used  for  expressing  the  length  of  other  things, 
like  ropes  or  fences,  so  is  "dollar"  used  to  express  the  value 
of  things  other  than  money,  like  houses  or  services. 

Since  "dollar"  really  means  "23.22  grains  of  pure  gold," 
a  promise  to  pay  so  many  dollars,  if  literally  interpreted,  is  a 
promise  to  deliver  the  stated  quantity  of  gold.  Indeed,  for 
the  clearance  of  international  balances  only  gold  bullion  is 
accepted.  If  coined  gold  forms  part  of  the  shipment,  it  is 
treated  as  bullion,  that  is,  taken  by  weight,  not  by  tale.  For 
current  commercial  transactions,  however,  this  mode  of  mak- 
ing pajTnents  has  long  been  abandoned  because  of  its  incon- 
venience. To  avoid  the  necessity  of  repeated  assaying  and 
weighing,  the  metals  came  to  be  coined  and  the  weight  and 
fineness  of  the  coin  guaranteed  through  the  government's 
stamp.  To  such  coin,  Ijut  to  no  other  form  of  money,  may  the 
terms  "money"  and  "dollars"  be  applied  with  equal  pro- 
priety. A  vague  conception  of  this  fact,  coupled  with  a  con- 
fusion of  the  ideas  "dollar"  and  "money,"  is  responsible  for 
the  notion,  often  expressed,  that  nothing  but  gold  coin  is 
"real"  or  "basic"  money  (88). 

That  the  unit  of  value  is  a  conception  independent  of  money 
can  even  be  shown  in  history.    MacLeod  points  out  that — 

there  are  several  passages  in  the  Iliad  and  Odyssey  which  show  that 
even  while  traffic  had  not  advanced  beyond  barter,  such  standard  of 
reference  was  used.  We  find  that  various  things  are  frequently 
estimated  as  being  worth  so  many  oxen." 

"MacLeod,  I,  p.  170. 


80. 81]  MONEY  93 

But  we  need  not  go  back  as  far  as  the  time  of  Homer,  In 
the  earlier  decades  of  the  nineteenth  century,  when  in  the 
several  states  of  Germany  different  units  of  value  were  in  use, 
the  "Mark  fein"  was  employed  in  interstate  commerce  as  a 
unit  of  account.  The  "Mark"  was  at  the  time  the  currently 
adopted  unit  of  weight  for  silver  (about  half  a  pound),  and 
the  coins  in  actual  use  were  appraised  by  the  weight  of  pure 
silver  they  contained  (98). 

8o.  Money  Not  a  Store  of  Value. — It  is  also  claimed  that 
money  is  a  means  of  saving  or  storing  wealth.  This  is  not 
literally  true.  The  man  who  hoards  gold  coin  does  really 
store  away  wealth  in  the  shape  of  gold  metal,  but  the  man  who 
hoards  bank  notes  does  not  thereby  store  any  form  of  material 
wealth,  for  the  notes  are  only  bearers  of  a  right  to  a  certain 
amount  of  wealth  which  is  actually  in  possession  of  others 
(282), 

8i.  Money  Not  a  Standard  of  Deferred  Payment. — The 
assertion  that  money  is  a  standard  of  deferred  payment,  unless 
intended  merely  to  emphasize  the  notion  that  it  is  a  standard 
of  value,  is  not  only  groundless,  but  actually  devoid  of  mean- 
ing. 

The  phrase  can  have  reference  only  to  promises,  either  to 
perform  some  service,  or  to  deliver  something,  at  some  future 
time.  But  in  every  contract  the  service  to  be  performed,  or 
the  thing  to  be  delivered,  at  some  future  time,  is  always 
specifically  described  and  is  by  no  means  always  money.  When 
a  farmer  borrows  a  bushel  of  oats  from  a  neighbor,  promising 
to  return  another  bushel  a  month  hence,  the  standard  of  de- 
ferred payment  is  oats.  Whatever  a  contract  specifies  is  the 
standard,  and  in  contracts  which  promise  the  payment  of  a 
number  of  dollars,  it  is  the  commodity  gold,  not  money,  which 
is  the  standard  of  deferred  payment.  Moreover,  anything 
which  is  promised  to  be  delivered  in  the  future  being  a  stand- 
ard of  deferred  payment  in  that  case,  it  follows  that  gold  is 
the  standard  only  where  it  is  specifically  or  by  implication 
promised  to  be  delivered.  The  property  of  being  a  standard  of 
doforred  pa^Tnent  cannot  therefore  be  regarded  as  being  in- 
herent in  money. 


94  FUNDAMENTAL  CONCEPTS  [82. 83 

82.  Importance  of  Sharp  Definitions. — These  criticisms 
may  look  like  hair-splitting.  But,  as  a  matter  of  fact,  correct 
reasoning  is  impossible  unless  the  words  which  convey  the 
thought  are  carefully  and  sharply  defined  and  used  only  in 
the  sense  of  their  definitions.  The  notion  that  money  is  a 
measure  of  value  has  led  to  more  than  one  untenable  con- 
clusion. Money  need  not  be  produced  to  provide  a  value  unit ; 
gold  has  been  adopted  for  this  purpose.  Nor  need  money  be 
manufactured  to  enable  men  to  defer  the  delivery  of  a  specified 
amount  of  wealth,  or  to  accumulate  wealth.  The  latter  is 
done  by  producing  more  wealth  than  is  consumed,  when  accu- 
mulation follows  as  a  matter  of  course.  For  none  of  these 
ends  was  it  necessary  to  invent  or  to  manufacture  money.  The 
only  incentive  to  its  production  and  emission  has  been  the 
desire  to  overcome  the  difficidties  experienced  in  the  processes 
of  simple  barter  (88). 

83.  The  Function  of  Money. — Simple  barter  was  neces- 
sarily the  original  mode  of  exchanging  things.  But  although 
adapted  to  compass  the  limited  traffic  of  primitive  peoples, 
barter  would  be  utterly  inadequate  for  the  commerce  of  a 
more  complex  society. 

Simple  barter  depends  on  two  distinct  coincidences.  To 
begin  with,  the  intending  barterers  must  each  have  something 
which  the  other  desires,  and,  furthermore,  the  desired  things, 
in  order  to  be  exchanged,  must  be  of  equal  value.  The  first 
of  these  coincidences  particularly  occurs  so  rarely  that  the 
extensive  commerce  which  goes  hand  in  hand  with  the  speciali- 
zation of  industry  would  be  wholly  impossible  if  we  had  to 
depend  merely  on  simple  barter. 

The  use  of  money  obviates  these  difficulties.  The  man  who 
has  something  to  exchange  need  only  find  a  person  desiring 
to  obtain  it.  He  will  receive  in  exchange  money  for  which  he 
can  in  turn  obtain  such  things  as  he  desires  from  those  who 
may  offer  them  for  sale.  Thus  A  may  sell  a  basket  to  B,  and, 
being  paid  for  the  same  in  money,  may  use  it  in  buying  a  hat 
from  C.  He  thereby  really  obtains  a  hat  for  his  basket. 
But  he  delivers  the  basket  to  ane  person  and  receives  the  hat 


84. 85]  MONEY  95 

from  another.  In  short,  he  need  not  hunt  for  a  hatter  who  is 
in  need  of  a  basket.  In  this  way  the  shortcomings  of  simple 
or  direct  barter  are  completely  met  by  the  process  of  complex 
or  indirect  barter  (52,  259),  a  process  involving  the  use  of  a 
medium  of  exchange,  money.  The  use  of  money  enables  him 
to  deal  with  the  community  at  large  as  a  second  party ;  through 
its  mediation  he  delivers  to  one  member  of  the  community  the 
goods  he  supplies  and  receives  from  another  member  the  goods 
he  demands. 

This  clearly  illustrates  the  true  function  of  money  to  be 
that  of  a  medium  of  exchange.  For  no  other  purpose  would 
it  have  teen  necessary  to  produce  money.  "We  should  there- 
fore define  "money"  as  any  medium  of  exchange  adapted  or 
designed  to  meet  the  inadequacy  of  the  method  of  exchanging 
things  by  simple  barter.  Anything  that  accomplishes  this 
object  is  "money"  (88). 

84.  The  Distinctive  Feature  of  Money. — Our  aim  should 
now  be  to  obtain  a  clear  understanding  of  what  it  is  that  dis- 
tinguishes money  from  aU  other  valuable  things,  namely,  its 
specific  quality.  At  first  glance  it  would  appear  that  this  prob- 
lem is  not  a  difficult  one.  Cannot  everybody  tell  money  from 
other  things?  Yet  the  particular  quality  which  is  possessed 
by  money  exclusively  and  which  imparts  to  it  its  specific  power 
is  rarely,  if  ever,  given  a  thought.  What  is  that  particular 
quality  ? 

This  question  is  not  answered  by  the  statement  that  money 
is  a  medium  of  exchange,  for  this  is  not  the  whole  story.  We 
are  now  trying  to  find  what  it  is  that  imparts  to  money  the 
power  to  ser\'e  as  a  medium  of  exchange.  If  a  book  is  sold 
for  a  dollar,  there  is  no  question  but  that  each  of  the  two  things 
is  given  in  exchange  for  the  other.  The  dollar  buys  the  book ; 
the  book  buys  the  dollar.  Why  should  the  one,  but  not  the 
other,  be  considered  a  medium  of  exchange  ? 

85.  Money  a  Product  of  Social  Compact. — The  one 
quality  which  is  peculiar  to  money  alone  is  its  general  accept- 
ability in  the  market  and  in  the  discharge  of  debts.  How 
does  money  acquire  this  specific  quality?    It  is  manifestly  due 


96  FUNDAMENTAL  CONCEPTS  [86.  87 

solely  to  a  consensus  of  the  members  of  the  community  to  accept 
certain  valuable  tJmigs,  such  as  coin  and  certain  forms  of 
credit,  as  mediums  of  exchange  (285,  298).  In  the  course  of 
time  this  consensus  developed  into  a  prevailing  tacit  agree- 
ment which,  in  the  case  of  legal-tender  currency,  has  found 
expression  in  a  statutory  compact  (93,  99).  This  prevailing 
agreement  is  that  through  which  gold  and  certain  forms  of 
credit  are  given  the  quality  of  money.  It  is  merely  con- 
ventional with  regard  to  bank  notes  and  bank  checks,  and 
also  in  international  commerce,  where  bullion  is  the  accepted 
means  for  adjusting  balances  of  trade.  When  serving  this 
office,  gold  is  just  as  truly  merchandise  as  it  is  money  (315). 
The  relationship  between  money  and  merchandise  is  there 
exhibited  in  its  true  light. 

86.  Monetary  Laws. — When  monetary  laws  were  first 
made,  they  merely  formulated  the  already  existing  conventional 
usage  of  accepting  certain  commodities  or  certain  forms  of 
credit  as  money.  Such  laws  can  of  course  have  sway  only 
within  the  jurisdiction  of  the  respective  authorities,  unless  by 
special  treaty,  as  in  the  case  of  the  Latin  Union,  some  of  the 
legal  money  of  one  country  is  made  also  legal  in  another. 

Monetary  laws  may  be  divided  into  two  categories.  They 
may  be  mandatory  or  permissive.  The  first  class  comprises 
the  legal-tender  laws  which  prescribe  those  forms  of  currency 
which  must  be  accepted  as  money  (95),  while  the  second  class 
embraces  laws  which  permit  and  promote  the  issue  of  currency 
which  may  be  accepted  as  money  by  those  who  are  willing  to 
do  so  and  which,  accordingly,  circulates  by  virtue  of  a  custom 
amounting  to  a  tacit  agreement  or  consent.  Legal-tender  cur- 
rency cannot  be  refused  by  a  creditor  on  the  plea  that  he  wants 
gold,  while  all  other  forms  of  currency  may  be  refused  and 
lawful  money  demanded.  In  current  business  transactions  this 
distinction  is  rarely  observed.  Both  bank  notes  and  checks 
are  usually  accepted  in  payment  without  hesitation. 

87.  The  Right  Conveyed  by  Money. — The  agreement  in 
question,  whether  it  be  of  a  tacit  nature  or  expressed  by  law,  is 
really  an  agreement  of  all  who  have  anything  to  sell  to  place 
their  merchandise  at  the  disposal  of  the  bearers  of  money  (93, 


88]  MONEY  97 

287).  These  latter  can  select  anything  in  the  market  and 
obtain  exclusive  possession  upon  the  delivery  of  an  equivalent 
amount  of  money.  The  merchant  concedes  in  effect  that 
money  conveys  a  right  to  an  equivalent  amount  of  the  mer- 
chandise he  offers  for  sale.  It  is  true  this  right  cannot  be 
enforced  by  law,  but  inasmuch  as  products  obtained  through 
specialized  effort  cannot  be  distributed  among  consumers  ex- 
cept through  processes  of  complex  barter,  it  follows  that  ac- 
ceptance of  the  means  of  that  complex  barter,  namely,  money, 
in  exchange  for  goods  is  a  matter  of  necessity.  The  right 
conveyed  by  money  is  enforced  by  a  power  superior  to  man- 
made  law — by  the  law  of  self-interest. 

Our  conclusion  on  this  matter  may  now  be  briefly  sum- 
marized. By  virtue  of  the  general  consensus  which  gives  it 
general  acceptability,  money  conveys  an  option  to  any  goods 
exposed  for  sale,  to  the  extent  of  the  value  of  the  money.  This 
command  over  the  market  is  not  possessed  by  any  other  form 
of  wealth. 

88.  The  Term  "  Money  "  in  its  Broadest  Sense. — In  an 
exhaustive  examination  of  our  present  subject  we  must  regard 
as  money  all  devices  used  for  mediating  exchanges.  Con- 
sidered from  a  purely  economic  standpoint,  the  term  "money" 
should  include  everything  that  performs  the  mission  of  money, 
no  matter  whether  its  domain  is  of  international  scope  or  is 
limited  to  national  or  even  to  lesser  fields.  It  is  true  this 
view  is  not  shared  by  the  majority  of  authorities  on  money, 
some  of  whom  confine  the  term  strictly  to  standard  coin,  others 
include  legal-tender  notes,  still  others  bank  notes  as  well,  and 
some  writers,  particularly  among  the  more  advanced  school, 
recognize  that  bank  credit  should  also  be  embraced  in  the 
term  "money."  The  excluded  forms  are  sometimes  tenned 
"money  substitutes"  (95,  293).  There  is,  however,  neither 
sound  economic  reason  nor  any  logical  necessity  for  making 
this  distinction  (69).  Insistence  upon  it  no  doubt  results  from 
a  failure  sharply  to  distinguish  the  meanings  of  the  two  terms, 
"dollar"  and  "money"  (79,  115).  The  evolution  of  money 
has  come  about  through  the  need  of  expanding  simple  into 
complex  barter.  The  business  world  needs  money  for  the  pur- 
7 


9S  FrXDA3IENT.\L  CONCEPTS  [89 

pose  of  excliange,  and  absolutely  for  no  other  purpose  (82) .  It 
is  indispensable  to  the  business  man  for  the  purpose  of  buying 
and  selling  things  and  services,  and  of  clearing  accounts  pay- 
able by  returns  from  accounts  receivable.  Why,  then,  should 
only  some  devices  performing  this  mission  be  called  "money" 
and  not  allf  The  merchant  does  not  care  whether  he  is  paid 
with  gold  coin,  with  notes,  or  with  valid  checks.  While  in  a 
civil  suit  the  court  is  by  law  obligated  to  recognize  only  lawful 
currency,  the  student  of  economics  is  under  no  such  restraint, 
as  the  sphere  of  his  research  is  not  limited  by  legal  definitions 
or  by  geographical  boundaries. 

In  conformity  with  our  definition  (83)  we  shall  apply  the 
term  ''money,"  particularly  when  used  in  the  comprehensive 
sense  of  the  right  conveyed  by  it,  broadly  to  all  means  for 
mediating  exchanges.  But  when  adverting  to  money  systems 
controlled  by  legal  authority,  we  shaU  use  the  term ' '  currency, ' ' 
especially  if  the  reference  is  directed  or  confined  to  money 
tokens.  In  this  light,  "money"  is  related  to  •"currency"  as 
' '  credit ' '  is  related  to  ' '  credit  instrument. ' ' 

8g,  The  Theory  of  Money. — In  whatever  form  money  may 
exist,  its  object  is  to  permit  indirect  or  complex  barter.  In- 
stead of  exchanging  goods  for  goods,  the  goods  are  first  ex- 
changed for  money  and  then  the  money  for  other  goods.  A 
member  of  the  community  who  delivers  wealth  or  renders  any 
other  form  of  service  to  another  member  may  thereby  be  com- 
pensated by  wealth  or  service  received  from  a  third  member. 
But  in  this  process  time  elapses  between  the  giving  and  the 
receiving,  and  during  the  interval  the  giver  of  the  service  is 
in  possession  of  money,  an  instrument  attesting  that  he  has 
given  wealth  or  rendered  service  to  the  community  and  is 
entitled  to  the  return  of  an  equivalent.  During  that  interval 
the  holder  of  money  is  evidently  a  creditor  of  the  community 
(115,  210,  211,  259).  Money  is  not  accepted  for  the  purpose 
of  eating,  wearing,  or  otherwise  consuming  it.  In  its  essence 
money  is  credii  acquired  through  rendering  a  service  to  the 
community,  a  credit  constituting  a  right  to  receive  from  the 
community  an  equivalent  in  kind.    A  piece  of  money — a  money 


f 

I 


90]  MOXEY  99 

token — merely  certifies  that  the  holder  is  entitled  to  a  return 
for  a  service  rendered  by  him  to  the  community. 

Strictly  speaking,  this  is  true  only  when  the  money  has 
been  obtained  in  pa^Tnent  for  goods  or  services.  Possession  of 
money  can  be  attained  in  other  ways.  Thus  the  statement  does 
not  apply  to  banks  when  they  issue  currency  which  they  get, 
not  in  return  for  wealth  delivered,  but  only  in  return  for 
security  deposited,  as  in  the  case  of  United  States  national 
banks.  They  do  not  part  with  ownership  of  the  security  which 
they  deposit,  but  only  with  its  possession.  Nor  is  it  applicable 
to  banks  receiving  money  on  deposit,  nor  to  borrowers  of 
money  who  obtain  it  in  exchange  for  mere  promises  to  return 
an  equivalent  sum  at  a  future  time,  for  no  form  of  wealth  is 
given  in  return  in  either  case.  Moreover,  money  may  be  ob- 
tained by  bequest,  by  gift  or  by  dishonest  means,  in  any  of 
which  cases  the  money  passes  into  the  holder's  possession  with- 
out any  goods  or  other  form  of  service  passing  in  return. 

90.  Money  Analogous  to  Book  Accounts. — The  theory  of 
money,  then,  is  closely  parallel  to  the  theory-  of  credit  and 
should  be  considered  accordingly.  If  there  were  no  money, 
any  system  of  crediting  sellers  and  debiting  buyers  would  be 
fully  competent  to  accomplish  the  work  now  performed  by 
money  (203).  It  would  be  immaterial  whether  these  credits 
are  recorded  in  books  or  conveyed  by  credit  tokens.  The  car- 
dinal condition,  of  course,  is  that  these  credits,  whatever  their 
form,  shall  be  accepted  at  their  value  in  exchange  by  those 
who  have  things  or  services  to  sell  and  that  they  shall  be  trans- 
ferable from  those  who  buy  to  those  who  seU. 

Suppose  that  instead  of  issuing  money  we  should  institute 
a  system  of  "accounting,"  by  recording  all  commercial  trans- 
actions, crediting  the  sellers  and  debiting  the  buyers  with 
the  value  of  the  goods  or  services  transferred.  If  it  were 
agreed  upon  that  every  credit  so  recorded  shall  entitle  the 
creditor  to  obtain  in  exchange  for  it  any  equivalent  mer- 
chandise offered  for  sale,  such  credit  would  serv'e  all  the  pur- 
poses of  money.  The  possessor  of  a  recorded  credit  could  thus 
utilize  it  to  the  extent  to  which  the  credit  entitled  him. 

This  is  virtually   the   method  on  which   the  bank-check 


100  FUNDAMENTAL  CONCEPTS  [91. 92 

system  is  based,  a  check  being  an  order  by  the  buyer  or  debtor 
to  transfer,  on  the  books  of  the  bank,  a  specified  amount  of 
his  credit  to  the  seller  or  creditor. 

The  application  of  this  system  to  all  transactions,  even  the 
smallest,  would  be  inconvenient  and  costly.  But  we  know  that 
credit  can  be  transferred  by  methods  other  than  book  entries, 
namely,  by  means  of  credit  tokens.  Our  currency  system  is 
of  this  nature.  Currency  consists  of  tokens  which  are  passed 
from  hand  to  hand  in  the  process  of  transferring  credit  from 
the  buyer  to  the  seller. 

Although  the  currency  and  the  accounting  systems  are 
different  in  form,  they  are  identical  in  principle,  hence  any 
theory  which  applies  to  either  system  must  apply  equally  to 
the  other.  While  the  currency  system  is  the  preferable  one 
for  minor  transactions  generally,  the  accounting  system,  on 
the  contrary,  is  the  most  convenient  method  for  mediating 
exchanges  on  a  larger  scale,  and,  since  this  is  the  simplest  in 
conception,  it  will  here  be  made  the  basis  of  our  further  study. 

gi.  Creditors  and  Debtors  of  the  Money  System. — The 
reader  may  have  observed  that  in  discussing  the  accounting 
system  we  dealt  only  with  credits  acquired  by  selling  things 
or  services.  So  far  the  case  is  parallel  with  existing  conditions 
in  the  use  of  money,  the  money  being  a  credit  for  services 
rendered.  In  general,  men  can  buy  only  when  they  have 
acquired  money,  presumably  by  selling  goods  or  services.  But 
there  is  another  side  to  be  considered.  Where  there  are 
creditors,  there  must,  of  course,  be  debtors.  In  correct  book- 
keeping the  ledger  must  always  balance.  The  sum  of  all 
credits  must  be  equal  to  the  sum  of  all  debts.  So  far,  in  dis- 
cussing the  accounting  system,  we  have  considered  only  cred- 
kors.  But  where  are  the  debtors?  If,  as  a  rule,  men  must 
sell  goods  or  services  before  they  can  hiiy  any,  there  must  be 
some  who  can  huy  goods  or  services  before  they  need  sell  any. 
Who  are  they  ? 

92.  The  Issuer  of  Currency  is  Debtor. — The  same  ques- 
tion, when  applied  to  the  currency  instead  of  the  accounting 
system,  assumes  this  form.  Who  are  those  who  obtain  goods 
or  services  in  exchange  for  money  before  they  have  acquired 


I 


92]  MONEY  101 

money  in  exchange  for  goods  or  services?  The  answer  is  ob- 
vious. They  are  those  who  issue  the  money  and  put  it  into 
circulation.  The  issuers  are  manifestly  the  debtors  in  the 
case  (105,  115,  210,  259).  In  point  of  fact,  money,  in  its 
very  essence,  is  an  acknowledgment  of  debt  (123). 

It  is  plain  enough  that  the  right  to  become  debtor  to  the 
money  system  by  the  issue  of  money  tokens  cannot  be  left  to 
any  and  everybody  unconditionally.  To  protect  and  secure 
the  credit  involved,  the  debtor  must  be  held  rigidly  to  account. 
Issuers  must  accordingly  be  required  to  furnish  security  that 
is  practically  free  from  risk,  and,  moreover,  the  community 
must  be  assured  that  such  security  has  been  furnished.  The 
wealth  on  which  this  security  is  founded  is  the  substance  which 
gives  value  to  the  money  and  which,  with  one  or  two  ex- 
ceptions that  shall  be  discussed  presently,  remains  in  posses- 
sion of  the  issuer.  The  right  to  control  the  issue  of  currency 
has  for  good  reason  become  a  prerogative  of  government,  to 
which  the  public  looks  for  assurance  of  the  soundness  of  the 
currency  (300). 

When  the  government  itself  becomes  the  issuer,  it  is  the 
rule  that  an  amount  of  gold  metal  covering  a  fraction  of  the 
face  value  of  the  issue  is  kept  on  hand  for  purposes  of  re- 
demption, while  the  bulk  of  the  issue  is  secured  by  the  credit 
of  the  government.  As  regards  such  currency,  the  people  are 
creditors  as  holders  and  users  of  this  money  and  debtors  as 
members  of  the  body  politic. 

According  to  the  nature  of  the  security  given  and  other 
conditions  of  the  issue,  currency  may  be  divided  into  four 
principal  classes,  namely,  standard  money,  legal-tender  notes, 
subsidiary  coin  and  notes  and  other  credit  instruments  that 
are  not  logal-tonder.  Each  class  may  embrace  several  systems, 
and  each  system  has  its  peculiar  features,  its  own  creditors 
and  debtors.  In  each  of  these  various  systems  the  issuers  are 
debtors  to  the  amount  of  the  respective  issue. 

Before  we  proceed  to  examine  the  several  systems  of  cur- 
rency, it  may  be  in  order  to  warn  the  reader  against  the 
erroneous  impression  which  the  term  "paper  money"  is  apt 
to  make.     Not  money,  but  only  money  tokens,  can  be  made 


102  FUNDAMENTAL  CONCEPTS  [93 

of  paper.  The  paper  serves  only  as  the  vehicle  of  a  promise 
and  thus  becomes  an  evidence  of  debt.  Not  the  paper,  but 
the  wealth  by  which  the  debt  is  secured,  is  the  real  substance 
of  the  so-called  paper  money.  The  term  "credit  money"  is 
more  descriptive  and  is  less  liable  to  mislead. 

93.  Standard  Money. — Where  the  coinage  of  gold  is  free, 
any  ow^ler  of  gold  may  take  it  to  the  mint  and  have  it  coined. 
By  this  process  a  part  of  his  wealth  is  converted  into  money. 
When  he  subsequently  exchanges  the  coin  for  goods  in  the 
market,  he  becomes  the  issuer  of  this  currency,  namely,  the 
one  who  can  and  does  buy  with  currency  before  he  must  sell 
to  get  currency. 

In  viewing  the  book-entry  credits  of  our  illustration  as 
an  analogue  of  coin  currency,  we  must  consider  coin  as  a 
credit  instrument,  that  is,  an  instrument  conveying  a  claim  to 
wealth  which  is  in  possession  of  others  (260).  This  is  not 
the  view  usually  taken,  but  it  is  the  only  one  from  which  a 
clear  insight  into  the  subject  can  be  gained,  and  from  which  a 
rational  study  of  the  problem  involved  can  proceed.  A  gold 
coin  differs  from  a  mere  disk  of  gold  not  only  in  that  its  weight 
and  fineness  are  officially  vouched  for  by  the  stamp,  but  in 
that — and  here  is  the  essential  difference — the  coin  obtains 
through  the  common  consent,  expressed  in  the  law  of  legal- 
tender,  a  command  in  the  market  (85)  which  the  disk  in  the 
absence  of  the  prevailing  consent  would  not  have,  even  in 
the  face  of  the  most  reliable  guarantee  of  full  weight  and 
fineness.  The  coin  invests  its  bearer  with  a  right  to  claim,  or 
a  power  to  obtain,  in  exchange  for  it  any  equivalent  mer- 
chandise exposed  for  sale,  a  right  which  a  piece  of  gold  not 
recognized  as  money  does  not  convey. 

In  the  ordinary  channels  of  trade,  as  distinguished  from 
those  of  banking,  gold  bullion  is  not  money,  but  mere  mer- 
chandise. Merchants  do  not  currently  take  it  in  exchange  for 
their  wares,  since  there  is  no  agreement  to  accept  it  as  cur- 
rency. But  when  put  in  the  conventional  form  of  coin,  it 
falls  within  the  agreement  through  which  the  gold  conveys  to 
the  holder  an  option  to  become  owner  of  any  equivalent  mer- 


93]  MONEY  103 

chaudise  exposed  for  sale  (87).  Those  who  accept  gold  coin 
in  trade  have  not  merely  the  hope  of  finding  some  one  willing 
to  accept  the  piece  of  gold  in  trade;  they  have  the  assurance 
that  every  one  who  has  merchandise  to  sell  will  deliver  it  in 
exchange  for  the  coin.  The  command  in  the  market  thus  con- 
veyed by  the  coin  is  the  one  typical  feature  of  money.  The 
receiver  of  coin  has  no  special  desire  for  the  metal  contained 
in  it,  except  in  so  far  as  it  affords  assurance  that  the  token 
actually  conveys  the  value  which  it  designates.  As  a  direct 
desideratum,  as  an  article  of  merchandise,  the  metal  of  the 
coin  affords  an  alternative  in  being  a  commodity  that  may  be 
used  or  sold.  The  function  of  the  gold  in  the  coin  is  that  of  a 
pledge  given  by  the  issuer  to  assure  the  payment  of  the  debt 
that  was  contracted  when  the  coin  was  firet  put  into  circulation, 
and  which  payment  is  made  only  when  the  gold  is  ultimately 
put  to  use  as  metal.  It  would  be  incorrect  to  assume  that  the 
owner  of  the  gold,  after  having  it  coined  and  passed  as  money, 
has  thereby  found  a  purchaser  for  his  gold  (114,  259).  The 
merchant  who  accepts  the  coin  in  payment  is  no  more  a  pur- 
chaser of  this  gold  than  the  banker  is  the  purchaser  of  bonds 
which  a  customer  offers  as  collateral  for  a  loan.  He  does  not 
want  the  metal  for  any  other  reason  than  the  banker  wants 
the  security ;  he  wants  a  medium  of  exchange,  an  instrument 
conveying  an  option  to  any  equivalent  merchandise  which  he 
wants  to  obtain.  Only  after  this  coin  is  put  into  a  goldsmith's 
crucible  can  the  gold  assume  its  normal  function  as  a  com- 
modity, and  only  then  wiU  it  have  found  a  purchaser.^^ 

If  we  could  follow  the  journey  of  a  coin  from  the  time 
of  its  coinage  until  it  is  melted  down,  we  would  find  that  the 
issuer,  when  using  the  coin  for  the  first  time,  obtains  goods  or 
services,  and  thereby  incurs  a  debt,  for  the  payment  of  which 
he  gives  the  gold  as  collateral  security.  Everyone  through 
whose  hands  the  coin  subsequently  passes  first  gives  and  then 

"Objection  miglit  be  made  to  this  argument  where  the  melting  of 
coin  for  its  metal  is  forbidden.  But  such  a  regulation  cannot,  in  the 
nature  of  things,  bo  enforced.  Indeed,  if  it  could  not  possibly  be 
evade<l,  coined  metal  would  be  deprived  of  its  value,  as  its  utility  would 
become  unavailable. 


104  FUNDAIVIENTAL  CONCEPTS  [94 

receives  goods.  Only  the  final  owner  who  melts  the  coin  down, 
or  otherwise  uses  the  metal  as  such,  after  giving  goods  or 
services,  accepts  the  gold  as  a  merchandise.  Thus  the  last 
recipient  really  buys  the  gold  from  the  first  issuer,  the  col- 
lateral having  been  applied  to  finally  cancel  the  debt. 

94.  Holder  of  Standard  Money  Both  Creditor  and  Debtor. 
— The  conditions  arising  from  issuing  standard  coin  are,  in 
some  respects,  peculiar.  The  security  being  identical  with  the 
denomination  of  the  debt,  there  is  no  danger  of  a  fluctuation 
of  its  price,  and  a  margin  to  cover  risk  is  unnecessary  (286). 
The  issuer  will  therefore  not  insist  on  an  ultimate  return  of 
the  security,  namely,  the  gold,  but  will  leave  it  optional  with 
the  temporary  creditor,  the  holder  of  the  token,  to  use  the 
pledge  for  cancelling  the  debt  if  he  so  chooses.  Thus  the 
identity  of  the  issuer,  namely,  the  individual  who  brought  the 
gold  to  the  mint  for  coinage  and  first  put  the  coin  into  circu- 
lation, is  lost,  and  the  bearer  of  the  coin  becomes  himself  the 
custodian  of  the  security,  the  gold.  In  a  sense  he  is  an  agent 
of  the  issuer. 

In  the  United  States  there  are  two  waj's  of  dealing  with 
the  pledge.  The  gold  may  either  be  permanently  embodied 
in  the  token  itself,  by  making  this  of  gold  corresponding  in 
weight  with  the  denomination ;  or  the  metal  may  be  deposited 
in  the  national  treasury,  there  to  be  held  in  trust  for  the 
bearer  of  the  tokens  which  are  issued  in  the  form  of  gold 
certificates.  These  two  forms  of  currency  are  virtually  iden- 
tical. The  only  difference  is  that  in  the  case  of  coin  the  pledge 
is  in  possession  of  the  bearer  of  the  token,  while  in  the  case 
of  certificates  it  is  in  custody  of  the  government.  In  the  latter 
case  the  government,  in  its  capacity  as  trustee  of  the  security, 
represents  the  debior,  while  the  bearer  of  the  certificate  is  the 
creditor.  In  the  case  of  coin,  each  successive  bearer  is  both 
debtor  and  creditor,  debtor  as  the  temporary  holder  or  trustee 
of  the  pledge,  and  creditor  as  a  claimant  to  merchandise.  It 
should  be  noted  that  his  credit  and  his  debt,  although  equal  in 
value,  are  not  identical  in  character.  His  credit  represents  a 
right  to  merchandise,  while  his  debt  consists  in  his  obligation 
to  deliver  the  gold  when  his  right  to  merchandise  is  made  good. 

This  aspect  of  the  subject  is  the  only  one  which  presents 


95]  MONEY  105 

to  the  student  a  perspicuous  view  of  the  salient  features  of 
money.  It  shows  in  its  tiiie  light  the  function  which  the  gold 
in  the  coin  performs.  It  brings  out  clearly  the  principle  which 
distinguishes  the  coin  from  a  mere  lump  of  gold,  and  points 
out  that  the  government  stamp  on  the  coin  imparts  to  it,  not 
value,  but  only  general  acceptahility. 

The  value  of  such  money  is  manifestly  determined  by  the 
amount  of  the  gold  which  is  actually  contained  in  the  token  if 
the  token  is  a  gold  coin,  or  which  can  be  obtained  on  demand 
if  it  be  a  gold  certificate. 

95.  Legal-tender  Notes. — For  the  purpose  of  enforcing 
their  acceptance  in  payment  of  debt,  certain  notes  are  by  law 
declared  to  be  ' '  legal  tender. ' '  These  notes  are  thereby  made 
legal  tender  for  paying  debt,  so  that  a  creditor  cannot  demand 
some  other  money  when  they  are  offered  (86,  99).  In  the 
United  States  only  specie  and  certain  issues  of  notes  bearing 
the  government's  promise  to  pay  dollars  are  made  legal  tender. 

"While  legal-tender  notes  are  "money,"  they  are  not  "dol- 
lars." It  is  clear  that  a  "promise  to  pay  a  dollar"  cannot 
itself  be  a  "dollar"  (79a).  In  the  strict  meaning  of  the  term, 
a  dollar  is  so  and  so  much  gold,  hence  a  promise  to  pay  so  and 
so  many  dollars,  if  taken  literally,  can  be  discharged  only  by 
the  delivery  of  the  specified  amount  of  gold.  But  in  the 
ordinary  course  of  business  payment  can  lawfully  be  made 
by  means  of  legal-tender  notes  instead  of  gold.  These  notes 
therefore  perform  the  same  function  in  discharging  debt  as 
gold  would.  They  are  actually  money,  not  merely  money  sub- 
stitutes (88),  as  they  are  often  designated;  but  they  are  sub- 
stitutes for  dollars,  that  is  to  say,  for  gold  (69).  The  very 
law  which  makes  these  promises  to  pay  dollars  the  legal  equiva- 
lent of  dollars  has  given  rise  to  that  perversion  of  language 
that  allows  the  term  dollars  to  signify  money  {79h,  115). 
Thus,  in  place  of  "a  sum  of  money  worth  one  hundred  dol- 
lars" we  simply  say  "one  hundred  dollars."  Colloquially  this 
inexact  expression  is  acceptable,  as  it  shortens  language.  It 
is  only  when  taken  in  its  literal  sense;  that  tho  phrast;  becomes 
misleading,  and  even  then  only  when  false  conclusions  are 
derived  from  its  misconstrued  meaning. 


106  FUNDA^IEXTAL  CONXEPTS  [96 

In  the  United  States  the  federal  government  alone  issues 
legal-tender  currency,  constituting  a  non-interest-bearing  pub- 
lic debt  which,  although  paying  no  interest,  yet  circulates  at 
an  undiscounted  value  equalling  the  full  value  of  the  gold  in 
which  it  is  redeemable  (76). 

When  legal-tender  notes  are  applied  to  the  pajTnent  of  a 
debt,  the  creditor  is  paid  only  in  a  legal,  but  not  in  an 
economic  sense,  for  the  notes  are  themselves  only  promises  to 
pay.  Initially  the  creditor  has  a  claim  against  a  particular 
debtor,  but  after  he  is  paid  in  money  he  has  in  its  place  a 
claim  against  the  community  (75,  341)  which  everyone  who 
has  anything  to  sell  is  ready  to  honor  with  goods  or  services. 
By  the  payment  of  money  the  right  of  the  creditor  is  not 
made  good,  but  merely  broadened,  so  as  to  apply  to  anything 
in  the  market  he  may  choose  (102).  His  claim  is  finally  satis- 
fied only  Avhen  he  receives  actual  produce  of  labor. 

96.  Depreciated  Currency. — "When  adequate  provision  is 
made  for  redeeming  the  promise  to  pay  dollars,  legal-tender 
notes  will  naturally  be  accepted  at  par  with  gold.  But  govern- 
ments have  not  always  been  able  to  redeem,  or  have  failed 
to  provide  for  redemption,  and  at  such  times  have  actually 
legalized  refusal  of  redemption.  In  this  country,  prior  to 
the  year  1879,  the  national  issue  known  as  the  "greenbacks," 
nominally  promises  to  pay  dollars  to  bearer  on  demand,  were 
neither  redeemable  in  specie  nor  even  accepted  by  the  govern- 
ment itself  as  the  equivalent  of  coin.  If  a  business  man  issues 
a  promissory  note,  he  is  legally  obligated  to  accept  it  at  par 
on  or  after  its  maturity  in  pajonent  of  any  debt  due  hitn,  but 
governments  issuing  currency  presume  to  be  independent  of 
the  rules  of  common  justice,  on  the  old  plea  that  ' '  a  sovereign 
can  do  no  wrong. ' ' 

However,  although  the  greenbacks  were  not  honored  by  the 
government,  the  people  in  general  acted  on  the  expectation 
that,  at  some  future  time,  the  notes  would  be  redeemed,  either 
in  silver  or  in  gold.^®    This  expectation  of  future  redemption 

"  The  United  (States  was  on  a  bimetallic  basis  at  the  time  these 
notes  were  issued. 


96]  MONEY  107 

gave  them  a  standing,  but  because  of  the  comparative  uncer- 
tainty, as  well  as  the  delay  of  redemption,  their  current  value 
was  below  their  nominal  value  (76),  a  condition  which  mani- 
fested itself  in  the  market  by  the  rise  of  gold  and  silver  to  a 
premium  (109,  112,  322),  The  circulation  of  depreciated  cur- 
rency in  other  countries  is  to  be  similarly  accounted  for.  In 
the  event  of  all  expectation  of  ultimate  redemption  vanishing, 
as  was  the  case  with  the  Confederate  notes,  the  value  of  the 
notes  naturally  falls  to  naught. 

When  dollars  of  gold  or  silver  did  rise  to  a  premium  over 
the  dollar  of  currency,  this  did  not  indicate  that  either  gold 
or  silver  had  risen  in  value,  but  that  the  currency  had  fallen 
below  parity  with  the  value  of  its  promise.  Instead  of  saying 
that  gold  or  silver  was  above  par,  it  should  reallj'  have  been 
said  that  the  dollar  of  currency  was  below  par.  This  miscon- 
ception arose  from  the  fact  that  the  currently  accepted  unit 
was  a  unit  of  lowered  value,  entailing  a  general  rise  of  the 
price  level,  including,  of  course,  a  coincident  rise  in  the  price 
—not  in  the  value — of  gold  and  silver. 

Currency  notes  which,  however  depreciated,  remain  in  cir- 
culation, are  not,  in  the  full  sense  of  the  term, ' '  irredeemable 
or  "inconvertible"  notes,  as  they  are  so  generally  termed.  If 
there  were  not  a  prospect  of  their  being  redeemed  at  some 
future  time,  they  would  have  no  value  and  would  go  out  of 
circulation  completely.  The  above  terms,  as  applied  to  notes 
in  circulation,  must  therefore  be  understood  as  implying  only 
a  suspension  of  payment  and  not  a  final  repudiation. 

Depreciation  is  not  an  invariable  consequence  of  suspension 
of  specie  pajTueut,  particularly  if  the  issuing  authority  accepts 
the  notes  at  par  with  specie.  Where  the  government  is  the 
issuer,  acceptance  of  the  notes  in  payment  of  taxes  at  par  with 
standard  coin  (100,  114)  is  a  means  of  maintaining  their  value. 

It  would  be  a  mistake  to  say  that  such  notes  are  irredeem- 
able, A  familiar  analogue  of  such  notes  is  met  with  in  store 
orders,  the  issuer  of  which,  while  not  promising  to  redeem 
them  in  so  many  dollars,  agrees  to  redeem  them  in  mer- 
chandise. They  are  manifestly  credit  instruments,  redeem- 
able indeed,  but  onlv  in  things  other  than   dollars.      Such 


108  FUNDAMENTAL  CONCEPTS  [97 

orders,  issued  by  individual  storekeepers  or  by  large  employers 
of  labor,  have  circulated  within  limited  fields  as  currency 
(106).  If  money  tokens  are  issued  by  the  government  and 
accepted  in  payment  of  taxes,  but  not  otherwise  redeemable, 
they  are  clearly  of  the  same  nature  as  store  orders,  for  they 
are  accepted  by  the  issuing  government  in  payment  for  services 
rendered  by  the  government  to  the  taxpayer  and  can  therefore 
circulate  at  par  with  specie. 

Nevertheless,  such  money  is  not  altogether  secure  against 
depreciation.  It  is  manifest  that  store  orders  can  have  value 
only  if  the  issuer  has  something  for  sale  which  the  holders  of 
the  orders  want  to  buy,  and  that  without  this  condition  the 
orders  are  practically  worthless,  no  matter  how  much  other 
wealth  the  issuer  may  possess.  Moreover,  if  the  goods  offered 
by  the  issuer  of  the  orders  are  held  at  exorbitant  prices,  such 
orders  can  be  made  instruments  of  extortion.  The  value  of 
store  orders  is  therefore  of  an  essentially  precarious  nature, 
and  their  use  as  currency  has  been  forbidden. 

Legal-tender  notes  bearing  no  effective  promise  besides  that 
of  acceptance  in  payment  of  taxes  have  the  same  defect.  If 
they  are  issued  in  such  volume  as  would  overreach  the  credit 
of  the  government,  they  would  depreciate.  It  cannot,  how- 
ever, be  determined  just  at  what  point  the  strain  on  the  public 
credit  would  have  effect.  Money  of  this  kind  always  possesses 
an  element  of  uncertainty  or  indefiniteness,  inasmuch  as  re- 
demption may  be  evaded  by  various  technicalities.  The  issue 
of  any  currency  not  directly  redeemable  in  the  standard  com- 
modity is  therefore  inexpedient. 

97.  Fiat  Money. — Money  tokens  bearing  no  other  promise 
than  that  of  acceptance  at  face  value  in  payment  of  taxes 
cannot  have  any  value  unless  the  unit  of  that  * '  face  value ' '  is 
related,  directly  or  indirectly,  to  some  standard  commodity. 
Such  relation  exists  if  at  the  same  time  money  which  is  related 
to  a  standard  commodity  is  in  general  circulation  and  estab- 
lishes the  accepted  unit  of  value.  By  being  accepted  at  par 
with  this  other  money,  those  tokens  are  brought  into  corre- 
spondence with  the  current  measure  of  value.    Otherwise  "ac- 


98]  MONEY  109 

ceptance  at  par"  would  have  no  significance  (322a),  as  there 
would  be  nothing  with  which  those  notes  would  be  at  par. 

The  fact  that  currency  has  continued  to  circulate  in  the 
market  during  periods  of  suspension  of  specie  payment  is  the 
source  of  a  widely  prevalent  belief  that  the  value  of  currency 
is  created  by  the  "fiat"  of  government  (322&)  through  the  act 
of  declaring  it  legal  tender,  thus  supplying  a  medium  of  ex- 
change for  which  there  was  a  certain  demand.  But  this  view 
cannot  be  sustained.  The  issuer,  in  emitting  these  notes,  ob- 
tains in  exchange  for  them  valuable  things  or  services.  By 
the  believei-s  in  fiat  money  the  value  so  obtained  is  considered 
to  be  a  legitimate  income  of  the  government,  termed  "seignor- 
age"  (113-114),  while  in  reality  it  should  be  regarded  as 
virtually  a  loan  of  which  the  notes  are  acknowledgments. 

History  records  a  number  of  instances  of  notes  issued  under 
this  erroneous  impression.  Prominent  among  them  are  the 
Continental  currency  of  the  American  Revolution,  and  the 
French  assignats  and  mandats.  They  circulated  for  a  time 
under  the  force  of  economic  momentum,  but  their  worthless- 
ness  was  sooner  or  later  recognized.  This  worthlessness  was 
not  due  to  an  over-issue,  as  some  economists  woidd  have  us 
believe,  but  to  the  fact  that  no  provision  had  been  made  for 
their  redemption. 

98.  History  of  Legal-tender  Laws. — Originally,  gold  and 
silver,  when  figuring  in  exchanges,  passed  by  weight  (79). 
For  the  purpose  of  saving  the  time  and  trouble  of  the  repeated 
weighing,  coins  of  these  metals  were  made  of  certain  weights, 
and  by  an  official  stamp  their  weight  and  fineness  was  certified. 
These  coins  retained  the  names  of  their  respective  weights,  and 
a  pound  of  silver  coins  thus  certified  was  known  as  a  pound 
of  money.  It  was  in  this  way  that  the  denominations  drachme, 
pound,  peso,  livre,  lire,  etc.,  originated. 

The  exclusive  right  to  coin  money  was  assumed  by  the 
state  and  so  became  the  prerogative  of  the  sovereign.  In 
course  of  time  some  rulers  made  this  prerogative  of  coinage  a 
source  of  income.  Having  borrowed  money  and  finding  them- 
selves in  straits  when  the  time  came  for  paying  the  debt,  they 
made  coins  lighter,  or  of  baser  composition,  than  before,  but 


no  FUNDAMENTAL  CONCEPTS  [gg 

continued  to  apply  the  term  "pound"  to  the  same  number  of 
pieces  which  before  the  debasement  made  up  a  pound  of  silver 
(114a).  The  difference  between  the  nominal  and  the  actual 
weight  afforded  an  income  which  was  termed  ''seignorage" 
(113),  the  light-weight  coin  being  applied  to  the  payment  of 
the  debt  contracted  when  the  coin  was  heavier.  By  repeatedly 
employing  this  process,  the  coins  were  ultimately  made  so  light 
that  the  "pound  of  money"  contained  only  a  small  fraction 
of  a  pound  of  silver.  This  process  was  carried  much  further 
in  France  and  Italy  than  in  England,^** 

Laws  declaring  such  light-weight  coin  legal  tender  for  full 
weight  were,  of  course,  necessary  to  consummate  the  fraud. 
Otherwise  there  would  have  been  no  need  for  legal-tender 
laws.  Thus  the  law  creating  legal-tender  money  was  con- 
ceived by  dishonest  sovereigns  who  used  it  for  defrauding  their 
creditors.  Similar  misuse  of  the  prerogative  of  the  sovereign 
power,  though  not  so  vicious,  has  been  made  whenever  the 
circulation  of  a  depreciated  currency  has  been  enforced  by 
legal-tender  enactments. 

As  a  matter  of  course,  all  reductions  of  the  weight  as  well 
as  other  forms  of  debasement  of  the  coin  were  promptly  fol- 
lowed by  a  corresponding  fall  in  the  purchasing  power  of  the 
legal  value  unit  (1146).  The  terms,  pound,  lire,  livre,  peso, 
lost  their  original  meaning  and  have  since  been  used  to  denote 
the  arbitrary  unit  resulting  through  the  repeated  reductions 
from  the  original  weight  of  the  precious  metal  in  the  coin. 

After  the  names  of  the  various  units  had  lost  their  literal 
meaning,  and  especially  after  gold  took  the  place  of  silver  as 
a  standard  of  value,  laws  were,  of  course,  necessary  to  state 
precisely  what  amount  of  silver  or  gold  should  constitute  the 
unit. 

99.  Legal-tender  Quality  Not  Essential  to  Money. — 
When  notes  are  in  fact  redeemable  in  dollars,  there  is  no 
need  for  legal  enforcement  of  their  acceptance.  The  general 
and  unreserved  acceptance  of  national  bank  notes  and  of 
checks  in  transactions  in  which  formerly  only  legal  tender  was 

"  Cf.  MacLeod,  I,  p.  273 ;  Conant,  I,  p.  138 ;  et  al. 


100]  MONEY  111 

accepted,  plainly  shows  that  there  is  no  discrimination  in 
practice  between  valid  legal-tender  notes  and  other  valid 
means  of  pajTnent,  and  that  legal-tender  laws  are  entirely 
superfluous  for  the  purpose  of  giving  currency  to  any  sound 
medium  of  exchange. 

But  while  legal-tender  enactments  are  not  necessary  to 
give  acceptability  to  notes  which  are  known  to  be  redeemable, 
yet  there  are  some  reasons  which  make  such  laws  desirable. 
They  give  expression  to  the  social  compact  through  which 
wealth  is  turned  into  money  (85),  and,  moreover,  they  pre- 
scribe what  is  to  be  regarded  as  money  in  an  action  at  law 
(95,306). 

100.  Subsidiary  Coin. — In  subsidiary  coin  the  nominal  and 
current  value  generally  exceeds  the  value  of  the  metal  of 
which  the  coin  is  made.  This  excess  of  value  is  attributed 
by  some  to  the  "fiat"  of  government.  Others  aver  that  the 
limited  supply  in  conjunction  with  the  demand  for  the  coin 
is  that  which  keeps  this  money  at  par.  But  neither  of  these 
assumptions  affords  the  correct  explanation.  The  continued 
circulation  of  subsidiary  coin,  notwithstanding  the  inferior 
value  of  the  metal  contained  in  it,  is  simply  due  to  the  fact 
that  this  coin  is  either  redeemable  in  legal  money  of  larger 
denomination,  or,  if  not  so  redeemable,  is  accepted  at  par  in 
payment  of  dues  to  the  issuer,  that  is  to  say,  of  taxes  (96).  In 
either  case,  subsidiary  coin  represents  an  indebtedness  of  the 
issuer  to  the  holder. 

There  is  no  inherent  reason  why  subsidiary  coin  should  be 
made  of  such  costly  metal  as  silver.  When  silver  was  the 
value  denominator  and  the  small  coins  contained  their  pro- 
portionate share  of  the  metal,  there  may  have  been  some  reason 
for  making  fractional  coin  of  silver,  since  it  could  then  be 
classed  with  standard  coin  not  depending  for  its  value  on 
redemption.  But  now,  since  the  denominator  is  gold,  there  is 
no  reason  for  continuing  this  practice.  Conservatism  alone 
can  account  for  the  persistence  of  a  custom  that  has  long 
since  outlived  its  usefulness.  If  the  value  of  the  metal  of 
which  these  tokens  are  made  should  fall,  the  issuer  must  bear 


112  FUNDAMENTAL  CONCEPTS  [loi 

the  loss,  just  as  he  would  gain  in  the  event  of  a  rise  of  this 
value.  The  fall  in  the  value  of  silver  has,  indeed,  burdened 
this  goverament  with  an  indebtedness  far  exceeding  the  so- 
called  seignorage  derived  from  the  issue  of  under-valued  coin. 
Being  redeemable  in  gold  and  also  accepted  at  par  in  payment 
of  taxes,  the  tokens  would  circulate  in  the  commercial  world 
at  par  even  if  made  of  aliuniniim  or  of  some  other  cheap 
metal  or  of  paper. 

Viewed  from  an  economic  standpoint,  the  silver  dollar  of 
to-day  should  evidently  be  classed  along  with  subsidiary  coin, 
for  the  current  and  nominal  value  exceeds  the  value  of  the 
metal  of  which  it  is  made.  These  coins  really  represent  a 
public  debt,  partly  secured  by  the  silver  they  contain  and 
partly  by  the  credit  of  the  government.  If  they  are  to  be 
retired,  it  must  be  by  the  government. 

The  silver  certificates,  based  on  silver  dollars  actually  de- 
posited and  held  in  the  federal  treasury,  bear  the  same  re- 
lation to  these  coins  as  gold  certificates  bear  to  the  gold 
deposited  in  the  same  treasury.  The  silver  certificates  illus- 
trate a  case  of  superposed  credit  (73),  for  they  convey  to  the 
holder  a  right  only  to  other  credit  instruments,  namely,  to 
silver  dollars. 

loi.  Bank-note  Currency. — Under  this  head  are  comprised 
all  non-legal-tender  bank  notes  issued  under  provision  of  law. 
In  the  United  States  the  "national  bank  notes,"  issued 
through  national  banks,  are  the  only  notes  of  this  type  now 
in  circulation.  They  bear  promises  of  the  respective  banks  of 
issue  to  pay  to  bearer  so  and  so  many  dollars  on  demand. 
Under  present  laws  these  notes  are  printed  by  the  govern- 
ment at  the  cost  of  the  banks,  and  their  issue  is  contingent 
on  a  number  of  conditions  of  which  the  principal  ones  are: 
(1)  that  federal  bonds  be  deposited  as  security  in  the  federal 
treasury,  (2)  that  a  certain  tax  be  paid,  (3)  that  each  bank 
redeem  its  notes  in  lawful  money  on  demand,  and  (4)  that  a 
redemption  fund  of  five  per  cent  of  the  issue  be  maintained 
in  the  federal  treasury.  There  are  several  additional  con- 
ditions of  minor  importance  which  need  not  here  be 
enumerated. 


102]  MONEY  113 

Nominally,  bank  notes  are  redeemable  in  ''dollars,"  that 
is,  in  a  definite  quantity  of  gold,  but  since  the  law  places  legal- 
tender  notes  on  an  equality  with  gold  coin,  the  banks  are 
free  to  tender  such  notes  in  redemption  of  their  own.  Being 
redeemable  in  gold  or  in  notes  which  are  redeemable  in  gold, 
the  value  of  bank  notes  is  on  a  par  with  gold. 

102.  The  Real  Issuers  of  Bank  Currency. — The  banks 
through  which  these  notes  go  into  circulation  would  appear, 
at  first  sight,  to  be  the  issuers  of  these  notes.  But,  in  reality, 
they  are  only  agents  in  the  process  of  issue.  The  actual  issuer 
of  a  note  is  any  one  who  in  the  process  of  issue  becomes  debtor 
of  the  money  system,  in  other  words,  the  possessor  of  wealth 
on  which  the  value  of  the  credit  money  rests.  To  realize  this 
fact  we  need  only  follow  the  successive  steps  by  which  national 
bank  notes  are  put  into  circulation.  The  government  prints 
the  notes  and  delivers  them  to  the  bank  of  issue  upon  deposit 
of  the  required  security.  Then  some  customer  of  this  bank, 
say,  a  manufacturer  who  is  in  need  of  money,  borrows  from 
the  bank  "^  on  deposit  of  some  credit  token — say  a  promissory 
note,  perhaps  supplemented  by  additional  security,  be  it  col- 
lateral or  endorsement — and  is  given  "credit"  on  the  books 
of  the  bank.  Upon  drawing  on  that  credit  for  cash,  he  re- 
ceives a  corresponding  amount  of  the  bank  notes.  Up  to  this 
point  the  notes  have  not  been  used  as  money,  the  transactions 
having  been  only  exchanges  of  credit  for  credit.  But  now  the 
manufacturer  uses  the  bank  notes,  say,  for  buying  supplies,  or 
perhaps  for  paying  wages.  This  is  the  first  exchange  of  the 
notes  for  real  products.  Only  this  last  transaction,  the  giving 
of  the  notes  for  goods,  results  in  a  condition  where  ownership 
and  po.ssession  of  actual  wealth  are  separated  (68).  The 
manufacturer  has  parted  with  the  money  and  has  the  goods; 
he  possesses  more  wealth  than  he  owns.  The  former  owners  of 
the  goods  have  given  up  possession  of  them  and  obtained 
money  in  exchange ;  they  now  possess  less  wealtli  than  they 
own.     Their  right  to  the  goods  they  had  for  sale  has  been 

"  For  simplifyinf,'  the  ar^nu-nt,  a  bank's  customer  having  some 
commercial  paper  discounted  in  liere  conHidored  a  borrower  giving  the 
note  as  collateral. 

8 


114  FUNDAMENTAL  CONCEPTS  [102 

converted  into  a  right  to  goods  for  sale  by  others  (95).  The 
manufacturer  is  debtor ;  the  holders  of  the  money  are  creditors. 
Nominally  the  manufacturer  is  debtor  to  the  bank,  but  the 
bank,  in  turn,  is  debtor  to  the  bearers  of  its  notes.  The  bank  is 
manifestly  a  neutral  factor  in  the  chain  by  which,  in  the 
ultimate  analysis,  the  manufacturer  is  indebted  to  those  who 
hold  the  notes;  not,  however,  particularly  to  those  whom  he 
paid  with  the  notes,  but,  in  general,  to  whosoever  may  be 
holder  of  bank  notes,  for  the  social  compact,  by  virtue  of 
which  those  notes  become  money,  merges  and  mutualizes  all 
debts  and  credits  of  the  money  system. 

In  reviewing  this  process  we  are  led  to  the  following  con- 
clusions (105a) : 

1.  So  long  as  the  bank  notes  are  held  by  the  bank,  or  are 
in  the  hands  of  the  borrower,  they  are  not  money  in  the  full 
sense  of  the  word,  but  are  merely  blanks  or  tokens  adapted  to 
become  money.  Their  holder  is  both  debtor  and  creditor; 
debtor  by  reason  of  the  promise  to  return  the  notes  or  their 
equivalent,  and  creditor  by  reason  of  his  possessing  the  notes. 

2.  The  notes  become  currency  and  are  added  to  the  volume 
of  money  in  circulation  when  the  borrower  gives  them  in  ex- 
change for  valuable  things  or  services,  and  whosoever  accepts 
them  in  exchange  for  what  he  supplies  becomes  creditor  of 
the  money  system.  It  is  in  this  transaction  that  the  currency 
is  issued. 

3.  The  notes  are  nominally  the  bank's  promissory  notes. 
But  it  is  not  the  bank  that  is  the  ultimate  debtor.  The  bank 
is  not  in  possession  of  the  substance  of  credit,  but  only  of 
instruments  of  credit  conveying  a  right  to  wealth  subject  to 
legal  seizure,  wealth  in  possession  of  the  real  debtors,  the  bor- 
rowers from  the  bank.  The  notes  in  circulation  are  instru- 
ments of  credit  secured  by  other  instruments  of  credit,  the 
ultimate  debtors  being  those  who  are  in  possession  of  the 
credit  substance,  the  wealth  conditionally  owned  by  the  holders 
of  the  bank  notes  (73),  These  possessors  of  the  credit  sub- 
stance are  the  real  debtors  of  the  bank  note  system ;  they  are 
the  real  issuers  of  the  notes  (264,  303). 

The  credit  instrument  furnished  by  the  real  issuer,  namely, 


1031  MONEY  115 

the  promissory'  note  through  which  he  pledges  his  property, 
lies  deposited  in  the  bank.  The  bank,  therefore,  and  not  the 
government,  is  the  custodian  of  the  pledge  which  conveys  the 
right  to  the  credit  substance.  But  in  order  to  hold  the  bank 
to  the  proper  performance  of  its  function,  the  government  has 
exacted  from  the  bank  another  security.  The  bank  is  really 
the  government's  agent,  performing  the  function  of  distribut- 
ing the  currency,  of  holding  the  pledge,  and  incidentally  of 
acting  as  insurer  of  this  pledge  (220,  289), 

It  is  thus  seen  that  the  currency  so  issued  is  doubly  secured ; 
first,  by  the  borrower's  acknowledgment  of  debt,  which  forms 
part  of  the  bank's  assets,  and  second,  by  the  bank's  security 
deposited  in  the  national  treasury.  We  shall  term  these  the 
issuers'  and  the  agents'  pledges  (286,  288). 

Continuing  our  illustration,  we  find  that  in  due  time  the 
manufacturer  pays  his  note  by  returning  the  borrowed  money 
to  the  bank.  If  he  pays  with  notes  of  that  bank,  they  are 
thereby  momentarily  retired  from  circulation  and  may  be  re- 
issued by  the  same  or  by  other  borrowers.  But  if  he  uses  other 
means  of  payment,  whether  other  notes,  checks  or  coin,  the 
security  underlying  these  takes  the  place  of  the  security  he 
withdraws. 

The  bank  may  become  a  real  issuer  of  its  own  notes  by 
using  them,  say,  in  paying  for  the  services  of  its  own  employes. 
The  notes  so  issued  are  then  still  doubly  secured,  namely,  first, 
by  the  assets  of  the  bank,  and  second,  by  the  bank's  security 
held  in  the  national  treasuiy. 

The  notes  of  a  bank  may  enter  into  circulation  through  a 
depositor  of  the  bank  who  is  not  a  borrower  and  who,  therefore, 
cannot  be  considered  an  issuer.  The  nature  of  such  transaction 
will  be  explained  at  a  further  stage  of  our  examination  (1056). 

103.  Evolution  of  Modern  Banking, — Before  the  dawn  of 
the  modern  era  commerce  depended  chiefly  on  gold  and  silver, 
in  the  form  of  bars  as  well  as  coin,  for  means  of  payment.  It 
became  a  practice  of  the  goldsmiths  who  made  a  business  of 
weighing  and  testing  the  precious  metals  for  the  merchants  to 
also  take  these  metals  and  other  valuables  for  safe  keeping  in 
their  strong  boxes.    Gradually,  goldsmitlis  located  in  different 


116  FUNDAMENTAL  CONCEPTS  [103 

cities  became  affiliated,  so  that  receipts  certifying  that  gold  or 
silver  had  been  entrusted  to  any  one  of  them  were  recognized 
and  redeemed  by  others,  and  these  certificates  came  to  be  used 
in  a  limited  way  as  a  medium  of  exchange,  passing  from  hand 
to  hand  in  payment  for  goods  (293).  They  were  readily 
accepted,  not  only  because  they  were  fully  secured  by  gold 
and  silver  actually  held  in  trust  by  the  issuers,  but  also  because 
those  issuers  were  known  to  be  responsible  through  possession 
of  wealth  of  their  own.  Our  present  gold  certificates  are  of 
the  same  nature  as  were  the  receipts  issued  by  these  old-time 
bankers. 

The  custodians  of  these  deposits,  observing  that  only  a 
small  fraction  of  the  metals  were  called  for  at  any  one  time  by 
the  holders  of  the  receipts,  conceived  the  idea  of  utilizing 
some  of  the  gold  and  silver  so  held,  by  lending  it  out  for  short 
terms  on  promissory  notes  or  other  securities.  The  borrowers 
generally,  instead  of  taking  the  metal  with  them,  left  it  on 
deposit  and  accepted  certificates  of  deposit  therefor.  Thus 
it  came  about  that  the  certificates  issued  and  used  as  money 
exceeded  the  amount  of  metal  actually  in  store,  the  excess 
being  covered  by  the  pledges  of  the  borrowers,  which  took 
the  place  of  the  shortage  of  the  metal.  But  in  order  always 
to  be  ready  to  redeem  the  certificates  that  were  currently 
presented  for  redemption,  it  was  considered  advisable  to  con- 
tinue this  process  no  further  than  the  point  where  the  out- 
standing certificates  amounted  to  about  four  or  five  times  the 
actual  bullion  on  hand  (322a).  The  short  terms  of  the  loans 
enabled  the  bankers  promptly  to  replenish  their  reserve  when 
it  fell  below  the  margin,  by  collecting  or  reducing  their  loans 
as  they  fell  due. 

Let  us  analyze  these  conditions.  While  the  reserve  fund  of 
bullion  amounted  to  one-quarter  of  the  outstanding  certifi- 
cates, these  were  covered  to  the  extent  of  that  one-quarter  by 
the  deposited  metal,  and  the  other  three-quarters  by  the 
pledges  of  the  borrowers.  The  outstanding  paper  was  thus  fully 
secured.  Inasmuch  as  the  certificates  performed  all  the 
functions  of  a  medium  of  exchange,  they  became  the  means 
of  utilizing  business  credits  as  so  much  actual  money  (264). 


104]  MONEY  117 

One-quarter  of  the  value  of  this  money  was  therefore  based  on 
wealth  in  the  fonn  of  precious  metal,  and  the  other  three- 
fourths  was  based  on  credit  pledges  of  the  borrowers  and 
was,  accordingly,  nothing  more  than  monetized  credit. 

This  presents  a  brief  review  of  the  evolution  of  bank  note 
currency.  The  continued  use  of  such  currency  clearly  de- 
pends upon  a  faithful  compliance  v.'ith  the  necessary  require- 
ments. But  the  possibility  of  deriving  large  profits  from  the 
issue  of  bank  notes  led  to  the  abuse  of  this  system,  through 
ignorance  or  dishonesty.  History  records  numerous  instances 
of  such  abuse  and  of  the  financial  disasters  that  followed; 
and  the  so-called  ** wild-cat  banking"  in  the  United  States 
during  the  middle  decades  of  the  nineteenth  century  may  be 
cited  as  a  notable  example  (3226).  To  avoid  a  recurrence 
of  such  irresponsible  note  issues,  the  federal  government  as- 
sumed control  of  the  issue  of  bank  notes  by  according  the 
privilege  to  banks  chartered  by  it,  imposing  at  the  same  time 
an  annual  tax  of  ten  per  cent.,  virtually  prohibitive,  on  all 
circulating  notes  except  those  issued  through  national  banks. 

104.  Bank  Credit. — When  banks  added  to  their  business 
of  money  changing  and  money  lending  the  function  of  effect- 
ing the  transmission  of  pajnnent  in  the  business  world,  a  new 
medium  of  exchange,  now  known  as  "bank  credit,"  came  into 
existence.  The  volume  of  this  medium  of  exchange  is  now 
far  greater  than  that  of  all  other  forms  of  currency  combined. 

Bank  credit  is  identical  in  its  general  nature  as  well  as  in 
the  process  of  its  generation  with  the  medium  of  exchange 
formed  by  the  certificates  issued  by  the  old-time  goldsmiths. 
Differences  exist  only  in  some  of  the  details.  Thus  to-day  de- 
posits consist  of  currency,  cheeks,  and  drafts  instead  of  gold 
and  silver  metal,  and  the  deposit  banks,  instead  of  issuing 
certificates,  merely  enter  on  their  })ooks  the  deposited  sums  to 
the  credit  of  the  depositors  and  authorize  them  to  draw  against 
this  account  "cheeks"  or  "drafts,"  which  are  orders  on  the 
bank  to  pay  specified  sums  of  money  to  designated  persons  or 
to  their  order.     Borrowers  also,  instead  of  receiving  money 


118  FUNDAMENTAL  CONCEPTS  [104 

or  certificates,  have  their  deposit  account  credited  with  the 
borrowed  amount  which  they  are  then  free  to  draw  upon. 

A  large  portion  of  the  money  received  from  depositors  is 
utilized  by  the  banks  in  loans.  The  pledges  of  the  borrowers, 
as  they  are  added  to  the  resources  of  the  bank,  take  the  place 
of  the  money  furnished  by  the  depositors  and  withdrawn  by 
the  borrowers.  In  this  way  the  wealth  of  the  borrowers,  repre- 
sented by  those  pledges,  becomes  the  largest  part  of  the 
ultimate  basis  of  the  bank  credit  which  is  utilized  as  a  medium 
of  exchange.  In  the  last  analysis,  the  borrowing  is  a  process 
of  turning  business  credit  into  currency,  a  process  of  monetiz- 
ing credit,  and  this  monetized  credit  attains  wide  circulation 
through  a  system  of  interchange,  organized  to  include  prac- 
tically all  batiks  of  the  country. 

This  monetary  system  has  its  peculiar  features  and  is  par- 
ticularly distinguished  in  that  the  money  exists  in  the  form 
of  book  account,  independent  of  tokens.  As  the  name  "bank 
credit"  implies,  the  money  itself  consists  of  the  credit  of  the 
various  banks,  the  bulk  of  whose  assets  consists  of  the  pledges 
of  borrowers.  The  real  substance  of  this  kind  of  money  is 
therefore  made  up  principally  of  the  borrowers'  business 
capital,  the  wealth  that  sustains  their  loan  pledges.  The 
volume  of  this  money  is  measured  by  the  amount  owed  by 
the  debtors  of  the  system  to  the  creditors  of  the  system.  Only 
when  some  of  this  credit  is  being  transferred  from  hand  to 
hand  is  it  put  in  the  form  of  tokens,  namely,  bank  checks ; 
hence  the  volume  of  bank  checks  which  at  any  moment  may 
be  in  transit  is  no  criterion  of  the  existing  volume  of  this  form 
of  money. 

There  is,  however,  a  limit  beyond  which  the  volume  of  this 
money  cannot  safely  be  increased.  A  certain  amount  of  lawful 
money  must  be  held  in  reserve  to  meet  the  current  demands  of 
depositors  for  cash.  Banks  established  either  under  the 
national  banking  law  or  under  the  laws  of  our  several  states 
are  forbidden  to  increase  or  renew  their  loans  when  their 
reserve  is  below  a  certain  percentage  of  the  sum  of  their 
liabilities  to  depositors.  The  ratio  necessary  for  insuring  the 
safety  of  the  system  has  been  indicated  by  experience,  and 


104]  MONEY  119 

the  law  merely  specifies  this  ratio  as  a  necessary  safeguard. 
Nominally,  the  cash  reserve  which  the  law  prescribes  for 
national  banks  in  cities  is  25  per  cent.,  and  for  countrj^  banks 
15  per  cent.  (292),  but  owing  to  the  legal  provision  which 
allows  a  bank  to  include  as  part  of  its  reserve  such  amounts 
as  it  has  deposited  in  banks  located  in  certain  cities,  the 
average  cash  reserve  in  actual  money  comes  down  to  about 
one-eighth — or  even  less — of  the  total  deposits  (255).  By  this 
system  each  dollar  held  in  bank,  in  conjunction  with  seven 
dollars'  worth  of  assured  business  credit,  is  made  to  do  the 
work  of  eight  dollars  of  money.  About  seven-eighths  of  the 
volume  of  banking  power,  then,  is  business  credit  performing 
the  function  of  a  medium  of  exchange  (238o,  281,  287). 

The  cash  reserve  which  banks  are  legally  required  to  main- 
tain, though  reduced  from  the  nominal  rate  by  the  provision 
above  noted,  must  consist  of  ' '  lawful  money. ' '  But  the  amount 
of  such  money  is  limited,  and  in  the  nature  of  things  only  a 
portion  of  this  amount  can  be  retained  by  banks,  the  other 
portion  remaining  in  circulation.  The  constraint  which  pre- 
vents banks  from  extending  their  credit  by  increasing  their 
loans  after  their  reserve  falls  below  a  certain  percentage  of 
their  deposits  inevitably  imposes  a  limit  on  the  expansion  of 
bank  credit,  in  other  words,  on  the  use  of  assured  business 
credit  as  a  medium  of  exchange.  Under  the  existing  system, 
the  sum-tot;d  of  all  bank  credit  subject  to  check  available  in 
the  United  States  cannot  be  more  than  about  eight  times  the 
sum  of  money  actually  remaining  in  reserve  {2d8b,  293). 

If  a  deposit  and  discount  bank  were  to  start  with  no  re- 
sources except  the  funds  of  its  depositors,  using  the  income 
from  discounts  to  defray  its  running  expenses  and  to  cover 
the  average  of  such  losses  as  are  likely  to  occur,  its  "bank 
credit"  would  remain  just  fully  covered  by  the  securities 
of  the  borrowers  plus  the  cash  reserve.  Practically,  however, 
there  .should  be  an  excess  or  margin  in  the  bank's  assets  to 
cover  unforeseen  shortcomings  of  the  borrowers'  securities,  and 
this  is  afTorded  by  the  net  resources  of  the  bank  itself,  namely, 
th(;  capital  stock,  plus  undivided  profits,  or  "surplus,"  if  such 
there  be.    These  net  resources  are  owned  by  the  stockholders, 


120  FUNDAMENTAL  CONCEPTS  (104 

whose  claims  are  second  to  all  other  claims  against  the  bank's 
assets  (304),  and  therefore  constitute  an  insurance  reserve  or 
margin,  without  which  depositors  would  scarcely  entrust  their 
money  to  the  bank. 

Bank  checks,  viewed  as  money  tokens,  are  analogous  to 
bank  notes,  from  which  they  differ  only  in  a  few  particulars. 
Apart  from  the  agents'  security — the  bonds  deposited  with 
the  government — the  two  forms  of  exchange  medium  are  alike 
in  being  secured  in  part  by  money  and  in  part  by  business 
credit ;  both  are  redeemable  in  lawful  money  by  the  bank  named 
on  their  face ;  and  both  come  within  the  scope  of  the  general 
consent  which  makes  them  acceptable,  at  least  within  their 
respective  spheres,  as  a  medium  of  exchange.  Thus  both  pos- 
sess the  essential  features  of  credit  money. 

Their  difference  extends  only  to  details  which,  to  be  sure, 
are  characteristic  in  their  way.  The  specific  features  of  the 
bank  notes  are  such  as  to  fit  them  for  general  circulation  as 
currency,  while  the  peculiarity  of  checks  is  that  they  are  highly 
convenient  means  of  making,  and  comparatively  safe  means  of 
transmitting,  payments,  especially  of  larger  sums. 

Checks  differ  from  bank  notes  in  that  they  are  written  and 
issued  by  the  party  who  desires  to  make  payment,  and  are  made 
out  for  the  specific  sum  to  be  paid.  A  check,  accordingly,  serves 
generally  for  one  payment  only,  and,  being  deposited  by  the 
payee  in  bank,  is  returned  to  the  bank  on  which  it  is  drawn 
for  collection  or  clearance.  For  this  reason  it  is  not  adapted 
for  general  circulation.  Moreover,  bank  credit  transferable 
through  check  has  no  other  security  than  the  assets  of  the 
particular  bank,  and  has  accordingly  no  other  margin  of  se- 
curity than  the  stock  and  possible  surplus  of  that  bank.  The 
government  exercises  no  direct  regulation  or  control  over  the 
issue  of  checks  and  gives  no  assurance  of  their  validity,  as  it 
virtually  does  in  the  case  of  bank  currency  which  is  doubly 
secured,  one  of  the  securities  being  in  custody  of  the  govern- 
ment. If  a  check  is  invalid  through  lack  of  credit  of  its  issuer, 
it  is  returned  unpaid  to  its  depositor,  who  has  recourse  to 
the  maker  of  the  check.  In  order  to  preserve  this  recourse, 
each  individual  or  bank  through  whose  hands  the  check  passes 


105]  MONEY  121 

records  such  passage  by  ''endorsing"  it,  and  in  practice  no 
check  is  accepted  in  pajTnent,  or  redeemed  in  cash,  unless  the 
last  endorser  is  recognized  as  responsible. 

105.  The  Real  Issuer  of  Bank  Credit. — Inasmuch  as  the 
system  of  bank  credit  subject  to  check  constitutes  in  itself  a 
distinct  monetary'  system,  it  necessarily  follows  that  it  has  its 
own  particular  circle  of  debtors  and  creditors  (92).  A  brief 
examination  of  the  case  will  show  that  the  borrowers  from  the 
bank  are  the  debtors  of  the  system,  and  the  depositors  of  the 
bank  are  the  creditors,  the  bank  being  merely  an  intermediary 
agent  (288). 

The  process  by  which  bank  credit  is  established  consists  in 
the  bank  according  "credit"  on  its  books  to  a  borrower  on 
basis  of  the  borrower's  obligation  to  discharge  the  debt  at  a 
future  time.  If  now  this  borrower,  by  drawing  on  the  credit 
so  obtained,  buys  goods  with  his  check,  then  his  bank  credit  is 
used  for  the  first  time  as  a  medium  of  exchange,  and  when  the 
payee  deposits  the  cheek,  the  credit  so  acquired  is  to  him  what 
so  much  money  would  be. 

The  analogy  existing  between  bank  credit  and  bank  notes 
is  apparent  from  the  following  conclusions  which  are  parallel 
to  those  which  we  have  reached  with  regard  to  bank  notes 
(102a): 

1.  Before  a  borrower  who  has  been  given  credit  on  the 
books  of  a  bank  draws  upon  it,  this  bank  credit  is  not  yet 
money  in  the  full  sense  of  the  word,  but  is  ready  for  issue 
through  check.  The  borrower  is  yet  both  debtor  and  creditor 
of  this  money  system ;  debtor  as  a  borrower  from  the  bank, 
and  creditor  by  virtue  of  his  deposit  account. 

2.  Bank  credit  is  put  into  circulation  when  the  borrower 
uses  it  in  payment,  through  check,  for  valuable  things  or 
services ;  this  first  use  of  bank  credit  by  the  borrower  signalizes 
its  issue.  The  individual  who  accepts  the  check  in  payment 
and  deposits  it  becomes  creditor  of  the  system.  'I'he  bank 
credit  so  acquired  serves  as  evidence  that  he  has  given  wealth 
to  the  community,  and  it  conveys  to  him  that  command  of 
the  market  which,  like  tho  possession  of  currency,  enables  him 
to  get  from  the  community  an  ecjuivalent  in  return. 


122  FUNDAMENTAL  CONCEPTS  [105 

3.  While  it  is  nominally  the  banks  which  are  indebted  to 
the  depositors,  it  is  really  the  borrowers  from  the  bank  who 
are  in  possession  of  the  credit  substance  that  are  the  real 
debtors.  The  bank  merely  possesses  the  instruments  through 
which  the  credit  substance,  the  real  wealth,  is  pledged.  The 
borrowers,  therefore,  are  the  real  issuers  of  the  bank  credit 
(264,  287),  and  the  depositors  are  the  real  creditors  of  this 
money  system. 

Whenever  a  borrower  of  a  bank  pays  his  loan,  the  volume 
of  bank  credit  is  thereby  reduced;  the  portion  he  had  issued 
is  retired.  Indeed,  the  process  of  issuing  and  retiring  of  bank 
credit  is  going  on  incessantly.  This  is  one  of  the  incidents  of 
the  system,  and  while  it  may  appear  complicated  in  its  details, 
the  system  in  its  general  aspect  remains  simple  enough.  The 
borrowers  and  the  depositors  of  banks  are  the  debtors  and  the 
creditors  of  the  system.  In  case  the  total  of  a  bank's  deposits 
exceeds  the  total  of  its  loans,  the  excess  is  covered  by  the 
bank's  reserve  and  tangible  property,  and  the  bank  is  to  that 
extent  debtor  of  the  system.  If,  on  the  other  hand,  the  total 
loans  exceed  the  total  deposits,  the  bank  is  creditor  of  the 
system  for  the  difference. 

We  can  now  understand  what  happens  when  a  depositor 
who  is  not  a  borrower  checks  out  the  bank's  notes  and  puts 
them  into  circulation  (1026).  By  so  doing,  this  depositor's 
bank  balance  is  reduced  and  the  volume  of  bank  notes  in 
circulation  is  increased.  This  increase  is  therefore  attended 
by  an  equal  reduction  of  the  sum  total  of  all  bank  credits 
subject  to  check.  There  is  no  increase  of  the  sum  total  of  all 
available  money,  but  only  an  increase  of  bank  note  circulation 
and  an  equal  reduction  of  the  total  volume  of  simple  bank 
credit.  The  transaction  is  not  one  of  issue,  but  one  of  a  sub- 
stitution of  one  kind  of  currency  for  another. 

This  simply  confirms  that  bank  notes  are  merely  bank 
credit  put  into  a  form  in  which  it  can  be  used  as  a  circulating 
medium  of  exchange.  Being  secured  through  the  ''agents' 
pledge,"  the  bonds  deposited  in  the  national  treasury,  the 
government  undertakes  to  supervise  and  guarantee  the  issue 
of  these  notes.    But  as  we  have  already  seen,  these  notes  are 


106,  107]  MONEY  123 

really  nothing  more  than  business  credit  employed  as  a  medium 
of  exchange. 

io6.  Subordinate  Systems. — There  are  yet  other  systems 
of  exchange,  mostly  of  a  restricted  compass,  which  require 
passing  mention  here.  According  to  the  premises  from  which 
we  started,  any  agreement,  expressed  or  implied,  among  any 
number  of  people,  whether  only  two  individuals  or  many 
millions,  to  use  certain  things  or  accredited  tokens  of  those 
things  for  facilitating  the  exchange  of  services  or  goods,  must 
be  considered  as  establishing  a  monetary  system. 

Such  a  system,  for  instance,  is  that  of  so-called  store  orders. 
It  was  formerly  customary  in  some  places  to  pay  at  least  a 
part  of  workmen's  wages  in  orders  upon  certain  dealers  in 
merchandise.  These  "store  ordei*s, "  though  not  redeemable 
in  any  form  of  money,  were  yet  redeemable  in  merchandise  at 
the  specified  stores,  and  for  this  reason  they  possessed  value 
(96).  They  were,  of  course,  not  adapted  for  general  circula- 
tion, but  within  the  circle  in  which  they  did  pass  they  were 
manifestly  a  medium  of  exchange,  being  in  fact  a  legal-tender 
in  payments  due  to  the  designated  dealers. 

Postage  stamps  as  well  as  railroad  and  theatre  tickets  may, 
in  a  way,  be  considered  a  form  of  money,  figuring  in  the  sale 
of  certain  services.  In  the  same  category  are  the  tickets  for 
meals  or  drinks  issued  by  clubs,  hotels  and  restaurants.  Finally, 
we  may  even  say  that  all  essential  elements  of  a  monetary 
system  are  momentarily  present  in  every  case  of  barter.  Each 
participant  agrees  to  accept  one  of  the  things  in  exchange  for 
the  other.  Thus  we  find  that  there  is  really  no  sharp  line  of 
distinction  to  be  drawn  between  the  modern  system  of  ex- 
change by  means  of  legal-tender  currency  and  the  original 
method  of  simple  barter.  Our  most  refined  and  complicated 
system  of  currency  is  but  a  result  of  gradual  evolution  from 
primitive  barter  and  does  not  differ  from  it  in  its  essential 
nature. 

107.  The  Value  of  Money. — On  taking  up  this  topic,  John 
Stuart  Mill  warns  his  readers  of  the  confusion  liable  to  arise 
from  the  popular  phrases  "money  is  dear"  and  "money  is 


124  FUNDAMENTAL  CONCEPTS  (107 

cheap, ' '  which  are  employed  to  describe  those  conditions  under 
which  money  commands  a  high  or  a  low  rate  of  interest.  This 
admonition  is  quite  as  necessary  now  as  it  was  then,  for  those 
phrases  are  still  as  much  misused  and  as  much  misunderstood 
as  ever.  The  reason  why  money  has  the  power  to  command 
interest  is  totally  different  from  that  which  gives  it  the  power 
to  command  commodities  in  exchange,  and  the  descriptions 
"dear"  and  "cheap,"  as  currently  applied  to  money,  are 
responsible  for  endless  confusion.  This  confusion  of  ideas  goeg 
so  far  that  many  otherwise  well  informed  men  are  firmly  per- 
suaded that  the  purchasing  power  of  money  depends  entirely 
on  its  power  to  command  interest  (360).  Nothing  could  be 
farther  from  the  truth,  and  no  better  illustration  of  the 
erroneous  nature  of  this  idea  can  be  cited  than  the  fact  that 
the  purchasing  power  of  money  and  its  interest-bearing  power 
or  interest  rate  vary  quite  independently.  In  fact,  the  in- 
terest-bearing power  of  money  is  frequently  high  when  its 
purchasing  power  is  low,  namely  when  prices  are  high.  There 
is  no  direct  relation  between  these  two  faculties  of  money, 
each  being  the  result  of  a  separate  cause.  Under  the  present 
heading  we  shall  confine  ourselves  to  an  analysis  of  the  ex- 
change value,  that  is  to  say,  the  purchasing  power  of  money, 
leaving  the  interest  commanding  faculty  for  future  considera- 
tion. 

In  the  development  of  commerce  various  staple  commodities 
have  been  used  in  effecting  compound  exchanges  and  have 
thus  performed  the  function  of  money  (123).  Such  com- 
modities were  accepted  in  barter  merely  to  be  used  in  sub- 
sequent barter.  In  this  way  they  passed  from  hand  to  hand 
until  they  happened  to  come  into  possession  of  some  who  had 
use  for  them  and  who  accepted  them  for  that  purpose.  Such 
media  of  exchange  passed,  as  a  matter  of  course,  at  their 
commodity  value. 

In  the  course  of  time  only  silver  and  gold  remained  in  use 
in  this  manner,  being  for  many  reasons  better  adapted  than 
other  things  for  such  use.  In  the  middle  ages  there  grew 
up  the  custom  of  having  goldsmiths  determine  the  weight 
and  fineness  of  the  silver  and  gold  tendered  by  merchants  in 


108]  MONEY  126 

pajinent  of  goods.  It  is  thus  apparent  that  the  metals  passed 
in  exchange  as  merchandise  performing  the  function  of  money. 
And  when,  later  on,  certificates  of  deposit  of  these  metals,  and 
ultimately  promises  to  pay  gold  or  silver,  that  is  to  say, 
credit,  took  the  place  of  the  metal  itself,  the  value  of  the 
metal  still  determined  the  value  of  this  medium  of  exchange. 

This  fundamental  law  of  the  value  of  money  prevails 
now  as  it  prevailed  then.  The  value  of  money  equals  the 
value  of  that  of  which  the  money  is  made,  be  it  gold  or  credit 
(125).  So  long  as  gold  is  the  value  denominator,  the  ex- 
change value  of  the  metal  gold  determines  the  purchasing 
power  of  all  money  which  consists  of  gold  or  of  credit  redeem- 
able directly  or  indirectly  in  gold. 

The  proposition  just  stated  was  taken  for  granted  when 
we  had  occasion  to  advert  to  the  value  of  money  in  connection 
with  the  description  of  the  several  types  of  currency.  There 
is,  however,  yet  to  be  considered  the  influence  which  the 
amount  of  the  metal  used  as  money  has  upon  the  market 
value  of  the  metal  and  therefore  of  the  money.  By  the  use  of 
this  metal  as  a  money  substance  the  demand  for  it  is  cor- 
respondingly increased  and  its  exchange  value  accordingly 
affected.'- 

io8.  The  Value  of  Gold. — This  influence  can  best  be 
studied  by  the  aid  of  the  graphical  method,  but  in  so  doing 
we  must  temporarily  adopt  a  value  denominator  other  than 
gold,  say  a  composite  unit  (31),  and  assume  that  the  demand 
for  and  the  supply  of  gold  were  rendered  in  terms  of  this  unit. 

Suppose  that  in  Fig.  11  the  curves  SS'  and  DD'  represent 
the  supply  of  and  the  industrial  demand  for  gold,  while  OQ 
measures  the  total  amount  of  gold  extant.  If  there  were  no 
additional  demand,  the  value  of  gold  would  adapt  itself  to 
the  ordinate  qa.     But  if  an  amount  of  gold  equal  to  OV  is 

"The  difference  should  be  noted  that  exists  between  "adopting 
gold  as  a  value  denominator"  and  "  using  gold  as  a  money  substance." 
In  a  later  chapter  it  will  be  shown  that  it  is  possible  to  abandon  gold 
as  a  money  substance  without  giving  it  up  as  a  value  denominator. 
Under  such  conditions  the  monetary  demand  for  gold  would  become  re- 
duced to  a  negligible  quantity. 


126  FUNDAMENTAL  CONCEPTS  [108 

held  apart  in  the  channels  of  exchange,  in  the  form  of  coin 
in  circulation  and  of  reserve  in  treasuries  and  banks,  the 
supply  remaining  for  industrial  uses  is  reduced  to  VQ.  The 
demand  curve  DD'  must  then  be  referred  to  this  remainder 
alone  as  the  available  quantity,  that  is,  the  curve  must  be 
bodily  shifted  into  the  position  EE';  and  the  current  value  of 
gold,  expressed  in  terms  of  the  composite  unit,  will  then  be 
given  by  the  ordinate  q'a'  of  the  new  point  of  intersection  a' 
(115).  While,  in  the  absence  of  a  demand  for  gold  for 
monetary  use,  the  quantity  of  the  metal  demanded  for  in- 
dustrial uses  would  equal  Oq,  the  diversion  of  the  volume  OV 
for  monetary  uses  not  only  increases  the  value  of  gold,  but 
also  reduces  its  industrial  demand  to  Vq'. 

The  total  amount  of  gold  OQ  is  divided  into  three  parts, 
the  first,  OV,  being  applied  for  monetary  uses;  the  second, 
Vq',  being  offered  in  the  market  in  one  form  or  another;  and 
the  third,  q'Q,  being  the  quantity  which  exists  in  various 
forms,  not  offered  in  the  market  (59). 

The  increase  of  the  value  of  gold  from  qa  to  q'a'  has 
greatly  stimulated  its  production.  Every  available  source  is 
utilized,  and  every  new  mining  field  is  rapidly  exploited. 

The  point  V  that  divides  the  amount  of  gold  applied  to 
financial  uses  from  that  remaining  in  the  field  of  industry 
and  otherwise  extant,  shifts  its  position  under  various  circum- 
stances. When  brought  to  the  mint  for  coinage,  gold  is  trans- 
ferred from  the  industrial  to  the  financial  field.  When,  as 
may  happen,  gold  is  withdrawn  from  monetary  use  and  applied 
for  industrial  purposes,  the  relation  of  the  respective  quan- 
tities is  changed  in  the  other  direction.  When,  for  any  reason, 
money  becomes  "scarce,"  the  demand  for  gold  for  monetary 
use  increases,  entailing  a  transfer  of  the  metal  from  the  in- 
dustrial to  the  financial  field,  thereby  increasing  the  quantity 
OF,  correspondingly  diminishing  the  quantity  VQ  and  dis- 
placing the  point  V  accordingly.  These  changes  account  in 
part  for  the  fluctuation  of  prices  as  the  conditions  of  business 
vary  from  time  to  time. 

The  diagram  clearly  exhibits  how  the  value  of  gold,  and 
with  it  the  purchasing  power  of  the  dollar,  is  affected  by  the 


109]  MONEY  127 

use  of  gold  as  a  money  metal,  and  why  it  is  that  the  value  of 
gold  is  sustained  at  a  higher  level  than  it  would  he  if  large 
quantities  of  it  were  not  used  for  coin  and  bank  reserve.  But 
it  is  practically  certain  that  sooner  or  later  methods  of  ex- 
change will  be  developed  through  which  credit  will  displace 
gold  as  a  substance  of  money  more  completely  than  now,  so 
that  the  greater  portion  of  gold  now  held  in  treasuries  and 
banks  will  be  liberated,  when  the  value  of  gold,  no  longer  sus- 
tained by  monetary  demand,  will  fall  and  approach  its  natural 
rate  qa,  Fig.  11  (320). 

log.  The  Price  of  Gold. — Our  reasoning  has  thus  far  been 
based  on  the  proposition  that  the  value  of  standard  coin  equals 
the  value  of  the  metal  contained  in  it,  and  that  the  "price" 
of  gold,  expressed  in  "dollars,"  cannot  change  so  long  as  gold 
is  the  current  value  denominator,  no  matter  how  much  the 
value  of  gold,  expressed  in  some  other  value  denominator, 
may  change. 

There  are  what  appear  to  be  exceptions  to  this  rule  which, 
however,  on  critical  examination  will  be  found  to  be  fully  in 
conformity  with  it.  These  apparent  exceptions  are  often  im- 
properly cited  as  contravening  the  principle  in  question. 

There  is,  of  course,  always  a  difference  of  price  between 
the  commercial  and  the  assaj^ed  metal.  For  obvious  reasons 
gold  cannot  be  marketed  at  its  coinage  value  unless  it  is  assayed 
and  the  degree  of  fineness  ascertained  and  guaranteed.  Old 
jewelry  usually  brings  a  comparatively  low  price,  partly  be- 
cause of  the  cost  of  collecting  and  refining  the  same  to  put  it 
in  marketable  form,  and  jjartly  to  allow  for  differences  duo 
to  the  crudity  of  the  assay.  The  same  is  true  of  the  gold  dust 
brought  from  mines,  especially  when  brought  from  newly  dis- 
covered fields.  The  cost  of  assaying  and  treating  such  dust 
is  increased  by  the  cost  of  carriage  to  the  nearest  accredited 
refinery. 

Owing  to  the  free  and  gratuitous  coinage  of  gold,  whereby 
the  owner  of  refined  gold  can  have  it  converted  into  money 
without  cost,  the  difference  between  wholesale  and  retail  price 
exhibited  ])y  other  commodities  is  not  ordinarily  observed  in 
the  gold  market.     It  is,  however,  not  totally  absent.     In  ex- 


128  FUNDAMENTAL  CONCEPTS  [no 

changing  foreign  gold  coin  for  domestic  money,  the  broker 
charges  a  commission  for  the  trouble  and  expense  of  again 
''selling"  these  pieces  of  gold,  a  charge  which  is  clearly 
analogous  to  that  which  the  retail  merchant  adds  to  the 
wholesale  price  of  the  goods  he  sells.  Of  a  like  nature  is  the 
slight  premium  which  the  seller  of  bar  gold  must  generally 
pay  when  he  desires  money  for  his  metal.  As  a  matter  of 
fact,  the  price  of  gold  in  the  London  market  fluctuates  and  is 
actually  quoted  in  market  reports  (122).  These  variations 
must,  of  course,  not  be  confounded  with  those  which  attend 
the  use  of  depreciated  legal-tender  credit  currency  (96).  The 
real  explanation  is  in  line  with  that  of  differences  in  inter- 
national exchange  and  may  be  more  fully  elaborated  as 
follows. 

Although  gold  is  our  value  denominator,  and  gold  coin 
can  have  value  only  because  it  consists  of  the  commodity 
gold,  yet  bullion  must  be  coined  before  it  can  legally  be  used 
for  the  payment  of  an  obligation.  But  taking  the  gold  to  the 
mint  involves  trouble,  and  the  coining  requires  time;  and  in 
the  measure  in  which  owners  of  gold  metal  desire  to  save  this 
time  and  trouble,  they  are  willing  to  make  a  sacrifice  by  offer- 
ing it  in  the  market  slightly  below  the  coinage  value.  The 
premium  thus  offered  by  sellers  of  gold  varies  according  to 
circumstances  and  is  usually  so  small  that  it  is  negligible  in 
ordinary  commercial  transactions.  But  the  fact  that  this 
varying  price  of  gold  is  never  above  the  coinage  price  con- 
clusively precludes  that  other  explanation  which  is  offered 
by  the  adherents  of  the  volume  theory  of  the  value  of  money 
(123). 

no.  Bimetallism. — Until  a  comparatively  recent  period, 
gold  and  silver  were  used  independently  as  money.  Silver, 
being  more  abundant  than  gold,  was  more  largely  used  and 
naturally  became  the  most  widely  accepted  standard  of  value 
in  trade  and  commerce.  At  the  same  time,  gold  was  accepted 
at  a  varying  course,  according  as  its  market  value,  compared 
with  the  silver  standard,  varied. 

To  avoid  the  complications  arising  from  the  ever  changing 
relation  in  the  value  of  silver  and  gold,  efforts  were  made  by 


110]  MONEY  129 

several  governments  to  maintain  a  fixed  relation  between  the 
two  metals  by  force  of  law.  Both  metals,  in  the  form  of  coins 
of  specified  weights  at  a  stated  ratio,  were  made  legal  tender. 
Various  enactments  were  adopted  by  different  countries  with- 
out international  cooperation.  France  established  a  system 
of  bimetallism  by  decreeing  151/4  weights  of  silver  as  the 
equivalent  of  one  weight  in  gold.  At  about  the  same  time  the 
United  States  adopted  the  ratio  15  to  1  in  its  newly  established 
coinage,  and  subsequently  both  countries  found  it  necessary 
to  change  the  coinage  ratio  so  that  the  silver  unit  was  16 
times  as  heavy  as  that  of  gold.  A  coin  containing  412^ 
grains  of  silver,  ^/^o  fine,  and  one  containing  25.8  grains  of 
gold,  also  ^/lo  fine,  were  each  declared  by  the  laws  of  the 
United  States  to  be  legal  tender  for  one  ' '  dollar. ' ' 

These  national  enactments  proved  unavailing  to  maintain 
gold  and  silver  at  a  fixed  value  ratio,  and  efforts  were  put 
forth  from  time  to  time  to  establish  such  a  ratio  by  international 
cooperation.  Arguments  were  advanced  with  a  view  of  demon- 
strating that  a  fixed  value  ratio  could  be  maintained  in- 
definitely by  admitting  both  metals  to  free  coinage  at  that 
ratio.  It  was  held  that  if,  through  any  cause  whatever,  one 
of  the  metals  composing  the  bimetallic  system  should  fall 
below  the  legally  fixed  ratio  of  value,  the  immediate  result 
would  be  that  more  of  the  metal  would  be  coined  for  circu- 
lation, while  coin  of  the  other  metal  would  be  withdrawn  from 
circulation  and  turned  into  the  market  as  bullion.  The  value 
of  the  cheapened  metal  would  be  boosted  up  by  the  reduction 
of  its  amount  in  the  market,  and,  at  the  same  time,  the  value 
of  the  other  metal  would  be  depressed,  because  the  market 
supply  would  be  increased  through  the  melting  down  of  coin. 
This,  it  was  asserted,  would  constantly  maintain  the  parity 
of  the  two  metals  at  the  ratio  fixed  by  law. 

It  is,  however,  obvious  that  this  process  of  equalization 
through  free  coinage  must  fail  whenever  the  cost  of  producing 
either  metal  changes  materially.  The  relatively  dearer  metal 
would  continuously  be  withdrawn  and  finally  disappear  from 
circulation,  leaving  only  the  cheaper  metal  as  currency. 

Happily,  a  general  recognition  of  the  impracticability  of 
9 


130  FUNDAMENTAL  CONCEPTS  [in 

the  double  standard  has  led  to  its  definite  abandonment.  The 
single  gold  unit  has  now  come  to  be  adopted  as  the  measure 
of  value  throughout  the  commercial  world. 

The  use  of  silver  for  subsidiary  coin  in  connection  with 
gold  as  the  standard  is  sometimes  mistaken  for  a  sort  of 
bimetallism,  but  this  is  an  error,  inasmuch  as  bimetallism 
requires  a  free  and  unlimited  coinage  of  both  metals. 

III.  Composite  Value  Units. — In  treating  the  subject  of 
the  value  unit  (316) ,  discussion  of  one  of  the  objections  to  com- 
posite value  units  was  at  the  time  deferred.  This  matter  can 
now  be  taken  up  again. 

The  nominal  value  of  a  credit  instrument — that  is,  an 
acknowledgment  of  debt — is  fixed  by  the  value  of  the  things 
or  services  which  the  debtor  promises  to  give.  In  other  words, 
a  credit  instrument  can  have  a  definite  value  only  if  it  is  a 
valid  promise  to  deliver  specified  things  or  services.  For  the 
same  reason,  credit  money  can  have  a  value  expressed  in  dol- 
lars only  if  redeemable  in  "dollars."  In  the  case  of  a  com- 
posite imit,  a  "dollar,"  instead  of  being  so  many  grains  of 
gold,  would  consist  of  a  scheduled  quantity  of  a  number  of 
commodities.  Thus  a  ten-dollar  note,  to  have  a  value  corre- 
sponding with  this  unit,  must  be  redeemable,  not  in  258  grains 
of  standard  gold,  but,  say,  in  15  grains  of  gold  plus  10  pounds 
of  flour  plus  25  pounds  of  cotton  plus  200  bricks  plus  20 
feet  of  lumber  and  so  forth,  or  whatever  schedule  may  have 
been  adopted.  The  impracticability  of  such  a  system  of  re- 
demption is  self-evident. 

To  obviate  this  difficulty  of  keeping  the  money  at  par  with 
the  adopted  standard,  the  following  plan  has  been  suggested. 
Let  the  dollar  of  currency  be  redeemable  in  gold,  the  amount 
of  which,  instead  of  being  fixed,  is  to  be  increased  or  reduced, 
according  as  the  value  of  gold  falls  or  rises  in  comparison  with 
the  adopted  composite  unit.  This  would  require  the  intro- 
duction of  a  constantly  changing  "index  number"  with  which 
to  multiply  the  present  weight  of  25.8  grains,  in  order  to 
ascertain  the  amount  of  gold  in  which  the  dollar  of  currency 
is  to  be  redeemed. 

If  practical  means  could  be  devised  accurately  to  determine 


Ill]  MONEY  131 

this  constantly  varying  index  number,  the  total  market  value 
of  the  scheduled  commodities  would  in  consequence  remain 
stationary,  and,  in  the  measure  in  which  this  aggregate  of 
things  is  representative  of  the  general  market,  the  mean  price 
level  of  all  things  would  be  approximately  stable. 

Whether  this  proposition,  which  has  lately  been  championed 
and  elaborated  in  detail  by  Irving  Fisher,  could  be  success- 
fully carried  into  practice,  and  if  it  could  be,  whether  it 
would  have  a  beneficial  effect  commensurate  with  the  work 
involved,  is  open  to  question.  By  whatever  method  the  index 
number  is  to  be  determined  from  time  to  time,  it  must  be 
through  reference  to  market  reports  which  are  by  no  means 
proof  against  "manipulation"  and,  even  apart  from  this,  are 
often  but  crude  approximations  between  two  stated  margins, 
an  indefiniteness  in  part  due  to  the  difficulty  of  sharply  defin- 
ing quality  (31a).  Moreover,  if  the  index  number  is  to  be 
corrected  at  frequent  intervals,  before  previously  announced 
changes  have  had  their  full  effect  upon  prices  generally,  the 
market  reports  would  continue  to  indicate  a  need  for  further 
change  when  no  such  change  were  really  needed,  and  the 
official  correction  would  over-reach  itself.  And  if  longer 
periods  are  chosen,  the  expectation  of  impending  changes  is 
not  unlikely  to  be  a  source  of  business  disturbance  because 
of  the  sudden  and  intermittent  effect  on  prices  generally. 

Another  proposition  for  maintaining  currency  at  par  with 
a  given  composite  unit  is  sometimes  advanced,  namely  to  in- 
crease or  reduce  the  total  volume  of  currency,  as  the  sum  total 
of  the  market  value  of  the  composite  unit  falls  or  rises,  but 
it  will  be  shown  later  (321)  that  every  attempt  along  this 
line  must  prove  abortive,  since  the  proposition  is  based  on  an 
erroneous  premise. 

The  fact  that  projects  of  this  kind  are  put  forth  from 
time  to  time  is  due  to  the  belief  of  many  that  our  frequent 
financial  upheavals  result  from  the  fluctuating  value  of  the 
"dollar,"  manifesting  itself  in  a  corresponding  but  opposite 
fluctuation  of  prices.  That  such  is  not  the  case  will  become 
apparent  in  the  further  course  of  our  investigation. 


132  FUNDAMENTAL  CONCEPTS  [112.  113 

112.  Depreciated  Value  Unit. — When  depreciated  legal- 
tender  notes — that  is,  nii fulfilled  promises  to  pay  "dollars" 
to  bearer — remain  in  circulation  as  the  current  money,  the 
dollar  of  currency  will  not  be  equal  to  the  dollar  of  the 
promise,  whether  gold  or  silver,  but  will  be  a  certain  variable 
percentage  thereof,  that  percentage  depending  on  the  general 
appraisement  of  the  readiness  or  ability  of  the  government  to 
ultimately  fulfil  its  promises  (76). 

In  the  United  States,  from  the  time  of  the  issue  of  the 
"greenbacks"  up  to  the  year  1879,  the  nominal  unit  of  value, 
the  "dollar,"  was  3711/4  grains  of  pure  silver  or  23.22  grains 
of  pure  gold,  while  the  actual  current  unit  was  the  depreciated 
value  of  the  government's  unfulfilled  promises  to  pay  such 
"dollars"  to  bearers  of  greenbacks.  The  real  dollars,  both 
gold  and  silver  coin,  were  accordingly  above  the  dollar  of 
this  currency  and  did  not  circulate  (96).  The  former  became 
merchandise,  the  value  of  which,  expressed  in  terms  of  dollars 
of  the  currency,  was  regularly  quoted  in  the  market.  The 
price  of  both  metals  went  up  and  down  as  the  probability  of 
an  early  resumption  of  specie  payment  appeared  to  vary.  But 
while  the  prices  of  both  metals  rose  and  fell  concurrently,  or 
nearly  so,  the  price  of  dollars  of  silver  was  not  equal  to  that 
of  dollars  of  gold,  because  the  prevailing  ratio  of  exchange 
of  the  two  metals  was  not  precisely  as  16  to  1. 

There  were  thus  three  legalized  units  of  value  (123),  only 
one  of  which,  that  of  the  lowest  value,  was  the  customary 
unit  of  account.  The  fact  that  the  dollar  of  account  con- 
tinued as  such,  while  the  dollar  of  gold  and  the  dollar  of 
silver  rose  and  fell  in  market  value,  was  by  many  construed  as 
proving  that  the  value  of  money  had  nothing  to  do  with  the 
value  of  the  money  metals  (322). 

113.  The  Seignorage  Theory. — Rieardo  promulgated  the 
theory  that  the  value  of  coin  equals  the  value  of  the  metal 
contained  therein  plus  the  amount  charged  for  coining  (115). 
be  this  charge  only  the  actual  cost  or  such  greater  amount  as 
the  sovereign  may  exact  for  the  purpose  of  a  revenue  from 
his  prerogative  of  issuing  currency,  this  charge  being  termed 


113]  MONEY  133 

"seignorage"    (98).      The   following  quotation   presents  his 
view  on  this  point : 

While  the  state  coins  money,  and  charges  no  seignorage,  money 
will  be  of  the  same  value  as  any  other  piece  of  the  same  metal  of  equal 
weight  and  fineness;  but  if  the  state  charges  a  seignorage  for  coinage, 
the  coined  pieces  of  money  will  generally  exceed  the  value  of  the  un- 
coined pieces  of  metal  by  the  whole  seignorage  charged,  because  it  will 
require  a  greater  quantity  of  labour,  or,  which  is  the  same  thing,  the 
value  of  the  produce  of  a  greater  quantity  of  labour,  to  procure  it. 

While  the  state  alone  coins,  there  can  be  no  limit  to  this  charge  of 
seignorage;  for  by  limiting  the  quantity  of  coin,  it  can  be  raised  to  any 
conceivable  value. 

It  is  on  this  principle  that  paper  money  circulates.  The  whole 
charge  for  paper  money  may  be  considered  as  seignorage.  Although  it 
has  no  intrinsic  value,  yet,  by  limiting  its  quantity,  its  value  in  ex- 
change is  as  great  as  an  equal  denomination  of  coin,  or  of  bullion  in 
that  coin.  On  the  same  principle,  too,  namely,  by  a  limitation  of  its 
quantity,  a  debased  coin  would  circulate  at  the  value  it  should  bear, 
if  it  were  of  the  legal  weight  and  fineness,  and  not  at  the  value  of  the 
quantity  of  the  metal  which  it  actually  contained.^ 

Upon  close  examination  this  statement  is  found  to  embrace 
a  hazy  confusion  of  two  independent  theories  of  the  subject 
(116a).  If  the  value  of  money  is  determined  by  the  quantity 
of  labor  necessary  to  procure,  not  only  the  metal  or  paper 
of  which  the  money  token  is  made,  but  also  that  with  which 
to  pay  the  seignorage  charged  by  the  government  for  turning 
the  metal  or  the  paper  into  money,  then  an  arbitrary  limita- 
tion of  the  quantity  of  money  so  issued  can  in  no  way  affect 
the  value  of  this  money.  On  the  other  hand,  if  an  arbitrary 
limitation  of  the  issue  is  essential  to  maintain  the  value  of 
the  money  above  the  value  of  its  substance,  then  the  quantity 
of  labor,  particularly  that  covering  the  seignorage,  cannot  have 
anything  to  do  with  the  case  (1166).  A  seignorage  charge 
might  indeed  impose  some  limit  on  the  amount  of  money  that 
would  be  issued,  as  this  toll  would  naturally  react  on  the 
demand,  but  Ricardo  and  his  followei-s  predicate  an  inten- 
tional, an  arbitrary  limitation  of  the  amount  to  be  issued,  and 
this  is  something  radically  different  from  the  limitation  that 
would  naturally  follow  as  a  consequence  of  the  imposed  toll. 

"Ricardo,  p.  213. 


134  FUNDAMENTAL  CONCEPTS  [ii4 

114.  The  Seignorage  Theory  Untenable.— Of  the  two 
theories  which  are  embraced  in  the  quoted  statement  we  shall 
first  take  up  the  proposition  according  to  which  the  current 
value  of  a  coin  equals  the  value  of  the  metal  plus  the  cost 
collected  by  the  government  for  coinage.  This  theory  is  also 
put  forward  by  John  Stuart  Mill,  his  statement,  in  brief, 
being  that  if  the  government  did  not  coin  money  gratis  for 
any  one  who  furnishes  the  metal,  coined  money  would  be  worth 
more  than  the  bullion,  for  the  same  reason  that  cloth  is  of  more 
value  than  yarn.  Were  the  government  to  make  a  charge  to 
cover  expenses,  the  coin  would  rise  to  the  extent  of  the  seign- 
orage, above  the  value  of  the  bullion,^* 

This,  manifestly  set  forth  as  a  self-evident  proposition,  is, 
however,  by  no  means  an  ascertained  fact  and,  on  closer 
examination,  will  be  found  to  be  not  only  open  to  question, 
but  altogether  untenable. 

The  use  of  a  watch  case,  for  instance,  is  to  protect  the 
works  of  a  watch  from  injury,  but  in  order  to  give  it  esthetic 
as  well  as  practical  utility,  it  is  made  of  gold  and  is  orna- 
mentally engraved.  The  work  of  the  goldsmith  has  added 
value  to  the  piece  of  gold.  According  to  Mill  the  same  reason- 
ing applies  to  coin.  But  the  two  cases  are  really  quite  dis- 
similar, since  the  object  of  coining  is  not  to  produce  an 
ornament.  From  the  first  the  stamp  on  coins  had  the  object 
of  officially  vouching  for  correct  weight  and  fineness,  and  this 
purpose  has  remained  the  same  till  now,  even  though  art  has 
added  beauty  to  the  piece.  Surely,  a  stamp  attesting  that  a 
piece  of  gold  has  a  stated  weight  and  is  of  a  stated  degree  of 
fineness  can  add  no  value  to  this  gold.  We  must  not  forget 
that  the  gold  of  the  coin  is  merely  a  quantity  of  metal  (93) 
performing  the  function  of  collateral  security  for  the  face 
value  of  the  coin. 

Let  us  suppose  that  the  United  States  were  to  make  a 
coinage  charge  of,  say,  5.8  grains  of  gold  per  dollar  and 
would  collect  this  charge  by  making  the  coin  of  a  weight  of 
only  20  grains  per  dollar,  thus  returning  20  grains  of  coin 

**  Cf.  Mill,  11,  pp.  38-39. 


114]  MONEY  135 

for  each  25.8  grains  of  gold  brought  to  the  mint  for  coinage. 
The  stamp  on  an  eagle  would  still  be  a  voucher  that  the  coin 
is  of  full  weight.  But  is  this  to  be  understood  as  meaning 
that  its  weight  is  vouched  to  be  258  or  200  grains?  In  the 
first  case  the  voucher  would  be  a  falsehood;  in  the  second, 
the  voucher  that  an  eagle  consists  of  200  grains  would  be  a 
declaration  that  a  dollar  is  20  grains  of  standard  gold,  and 
the  purchasing  power  of  the  dollar  would  adapt  itself  accord- 
ingly.-^ 

Or  suppose  the  government  were  to  make  coin  of  full 
weight,  namely  at  the  rate  of  25.8  grains  of  standard  gold  per 
dollar,  and  would  demand  payment  for  coinage  from  those 
who  bring  gold  to  the  mint.  What  would  be  the  result  upon 
the  value  of  that  coin? 

Since  the  function  of  the  metal  in  any  standard  coin  is 
that  of  a  full  collateral  security  for  the  debt  of  which  the 
coin  is  a  token,  and  since  this  collateral,  when  applied  to 
cancel  the  debt,  has  value  only  as  bullion,  it  follows  that  the 
coined  piece  of  gold  cannot  have  a  value  exceeding  its  bullion 
value.  If,  then,  the  owner  of  gold  who  brings  it  to  be  coined 
must  give  besides  the  25.8  grains  per  dollar  some  more  of  his 
gold  to  pay  for  coinage,  the  question  arises:  What  would 
impel  him  to  bear  this  charge,  when  he  can  sell  his  bullion  at 
the  rate  of  one  dollar  for  each  25.8  grains? 

If  this  charge  for  coinage  were  less  than  the  cost  of  selling 
the  bullion  in  the  market,  then  the  owners  of  gold  would 
doubtless  be  willing  to  pay  this  charge  for  having  their  gold 
coined,  thus  sacrificing  the  tax  so  paid,  since  coining  would 
save  them  the  cost  of  marketing  the  gold.  But  if  the  govern- 
ment's charge  were  to  exceed  the  cost  of  marketing  the  metal, 
then  gold  would  not  be  brought  to  the  mint  for  coinage,  but 
would  go  uncoined,  unless  the  government  itself  were  to  buy 
the  metal  and  coin  it  for  its  own  requirements. 

That  the  value  of  a  standard  coin  does  not  exceed  its  bullion 

"  It  is  liorc  aHHumcd  that  tlio  200  grain  paglc  would  be  standard 
coin,  that  is,  not  redeemable  by  the  {,'ovcrnnient  in  2.')8  grains  of  gold, 
for  in  tiiat  case  the  gold  coin  would  be  a  credit  token,  like  subsidiary 
coin. 


136  FUNDAMENTAL  CONCEPTS  [115 

value  is  fully  borne  out  by  history.  Wheu  the  "pound"  of 
silver  was  coined  by  European  mouarchs  in  pieces  less  than 
their  nominal  weight  (98a),  the  coined  silver  did  not  circu- 
late at  its  nominal  or  legal  value,  the  "pound"  of  silver, 
but  at  a  value  corresponding  with  the  precise  amount  of  silver 
the  coin  actually  contained  (98Z>).  This  fact  is  certainly  not 
in  harmony  with  the  seignorage  theory. 

Our  experience  with  greenbacks  is  equally  fatal  to  the  same 
theory.  The  value  of  the  depreciated  greenbacks  always  re- 
flected the  average  expectation  of  their  ultimate  redemption. 
During  the  civil  war  a  battle  lost  by  the  federal  troops  at 
once  advanced  the  price  of  gold ;  a  victory  gained  was  promptly 
followed  by  a  fall  of  gold  quotations.  Since  the  resumption 
of  specie  payment  these  notes  have  remained  at  par  with  gold. 
All  these  facts  are  wholly  inconsistent  with  the  seignorage 
theory,  namely,  with  the  notion  that  the  value  of  these  notes 
was  determined  by  the  charge  which  the  government  made  for 
their  issue.  The  facts  can  be  clearly  accounted  for  only  on 
the  theory  of  currency  value  which  we  have  considered  in  the 
preceding  pages  (107-112). 

Without  doubt,  the  seignorage  theory  was  conceived  and 
formulated  in  the  endeavor  to  account  for  the  phenomenon 
presented  by  subsidiaiy  coin.  It  did  not  occur  to  Ricardo  and 
his  followers  that  such  coins  are  in  reality  credit  instruments 
which  are  accepted  by  the  issuing  government  at  their  face 
value.  Fractional  coin  does  indeed  circulate  at  a  value 
exceeding  its  metal  value,  but  this  is  so  because,  in  the  first 
place,  fractional  coin  is  redeemable  by  law  in  standard  money, 
and  second,  because  it  is  accepted  at  par  in  payment  of  taxes 
(96).  When  the  subject  of  credit  is  correctly  understood,  the 
mystery  attached  to  subsidiary  coin  disappears,  and  the  seig- 
norage theory  is  found  to  be  a  misconception. 

115.  The  Volume  Theory  of  the  Value  of  Money. — 

Among  the  various  ideas  concerning  money  there  is  none  put 
forward  more  persistently  than  that  known  as  the  "Volume 
Theory  of  the  Value  of  Money."  According  to  this  theory 
the  purchasing  power  of  the  dollar  depends  upon  the  relation 


115]  MONEY  137 

Avhic'h  the  supply  of  money  bears  to  the  demand  for  money; 
it  falls — that  is,  prices  rise — as  the  supply  of  money  is  in- 
creased or  the  demand  reduced;  it  rises — that  is,  prices  fall 
— when  the  demand  for  money  is  increased  or  the  supply 
reduced. 

This  view  of  the  relation  of  money  to  prices  arises  out  of 
the  use  of  the  term  ''dollar"  in  the  sense  of  "money"  (78, 
88,  95)  which  has  led  to  the  notion  that  the  dollar  is  a  "money 
unit"  instead  of  what  it  really  is,  a  value  unit,  consisting  of 
a  stated  amount  of  the  standard  commodity.  Along  with 
other  theorists  on  the  subject  John  Stuart  Mill  appears  to 
have  believed  in  the  existence  of  a  unit  of  money  the  value 
of  which  may  vary  from  the  value  of  the  gold  contained  in 
the  standard  money,  M^hen  he  says,  apropos  of  conditions 
resulting  from  an  increase  of  currency: 

An  ounce  of  manufactured  gold  will  become  more  valuable  than  an 
ounce  of  gold  coin,  by  more  than  the  customary  difference  which  com- 
pensates for  the  value  of  workmanship;  and  it  will  be  profitable  to  melt 
the  coin     .     .     ." 

With  the  introduction  of  a  "money  unit"  which  may 
differ  from  the  gold  unit  we  are  confronted  with  a  theory  to 
account  for  the  value  of  money  which  differs  from  that  which 
traces  the  value  of  money  to  that  of  the  standard  commodity 
(107-112).  Both  cannot  be  correct,  and  in  order  to  find 
which  of  the  two  actually  prevails,  we  must  subject  them  to 
a  critical  comparison. 

According  to  the  volume  theory  the  value  of  money  de- 
pends upon  the  quantity  of  money  in  circulation  and  the 
demand  for  money  (322).  According  to  the  other  view,  the 
commodity  theory,  it  depends  upon  the  value  of  that  of  which 
the  money  is  composed,  whether  it  be  the  commodity  gold, 
or  credit  expressed  in  terms  of  that  commodity,  or,  according 
to  some,  upon  the  value  of  the  metal  plus  the  cost  of  coining 
it  (113).  In  the  one  ease,  the  value  of  the  dollar  is  supposed 
to  be  regulated  by  supply  and  demand  of  money,  in  the  other 
by  supply  and  demand  of  the  metal  gold.     According  to  the 

^Mlill.  11,  p.  89. 


138  FUNDAMENTAL  CONCEPTS  [115 

former  theory,  every  change  in  the  volume  of  money,  other 
things  remaining  equal,  is  followed  by  a  corresponding  change 
of  prices,  even  though  the  value  of  the  metal  gold  remains 
unchanged.  According  to  the  other,  a  change  in  the  volume 
of  money  affects  prices  only  if  such  change  reacts  upon  the 
value  of  gold,  and  even  then  only  in  the  measure  of  such 
reaction;  and,  as  we  have  already  learned  (108),  this  reaction 
is  not  in  proportion  to  the  change  in  the  volume  of  money. 

The  assumption  that  the  value  of  money,  like  the  value  of 
commodities,  is  determined  by  the  supply  of  and  the  demand 
for  money  is  based  on  an  analogy,  but  the  analogy  is  irrelevant. 
Money  cannot  be  treated  as  though  it  were  a  specific  com- 
modity, like  potatoes,  hats,  chairs.  Money  in  itself  is  not  use- 
ful in  the  sense  of  having  the  faculty  of  gratifying  desires. 
Only  the  gold  of  which  coin  is  made,  or  in  which  currency  is 
redeemable,  has  this  capacity.  The  demand  for  money  is  not 
a  consumers'  demand  (58)  which  is  reduced  or  satiated  with 
continued  gratification.  Nor  is  the  supply  of  currency  a 
producers'  supply  which  requires  the  stimulus  of  a  recom- 
pense, for  it  is  regulated  by  legislation  and  not  by  the  re- 
luctance of  the  producer  to  endure  the  strain  of  production, 
varying  with  the  amount  produced.  Supply  and  demand  of 
money  cannot  be  represented  by  a  rising  and  a  falling  curve, 
like  SS'  and  DD'  of  Fig.  6,  and  in  the  absence  of  the  features 
illustrated  by  these  curves  there  cannot  be  a  point  where 
supply  and  demand  come  to  a  balance,  that  is  to  say,  where 
desire  is  balanced  by  reluctance  (63).  ^ 

Money  is  not  a  specific  commodity;  its  essence  is  that  of  a 
credit,  each  money  token  being  a  credit  instrument,  conveying 
a  right  to  a  stated  amount  of  wealth  (240).  The  value  of 
money  therefore  follows  the  same  law  that  determines  the 
value  of  credit.  And  the  value  of  credit  is  the  amount  of 
wealth  which  is  specified  as  owing,  and  from  this  it  does  not 
differ  unless  the  credit  lacks  assurance.  It  is  the  value  of  the 
metal  gold,  it  is  cost  and  utility  as  regards  gold,  which  de- 
termines the  value  of  money  where  gold  is  the  standard  of 
value. 


116]  MONEY  139 

If  it  were  asserted  that  the  creation  of  new  debts  would 
have  the  effect  of  diminishing  the  value  of  all  previously  ex- 
isting debts  in  such  proportion  that  the  old  and  the  new  debts 
together  would  have  only  the  same  value  as  the  old  debts  had 
before,  the  assertion  would  at  once  be  recognized  as  untrue. 
Yet,  the  volume  theory  is  based  on  this  very  assumption  as 
regards  all  those  forms  of  debt  which  through  communal 
agreement  are  made  available  as  a  medium  of  exchange. 

As  regards  credit  money,  including  bank  credit  over  and 
above  the  metallic  reserve,  the  real  substance  of  that  money  is 
the  miscellaneous  wealth  which  constitutes  the  pledges  that 
afford  the  assurance.  Through  the  principle  of  credit  this 
wealth  is  made  available  for  the  purpose  of  a  medium  of 
exchange  (69),  and  through  the  communal  consensus  that 
wealth  is  invested  with  the  faculty  of  doing  service  as  money. 
This  wealth  is  not  used  bodily  as  money,  but  only  through  the 
mcdiimi  of  a  credit  conveyance,  while  itself  continuing  in  use 
for  the  purpose  for  which  it  was  produced.  The  only  form 
of  wealth  bodily  in  use  as  money  is  gold  when  circulating  as 
coin,  or  when  stored  in  a  redemption  fund  or  held  as  bank 
reserve. 

Suppose  it  were  true  that  paper  tokens,  upon  being  de- 
clared legal  tender  for  debts,  acquire  value  by  dint  of  the 
universal  demand  for  a  medium  of  exchange.  These  tokens, 
in  order  to  circulate  as  money,  must  evidence  that  the  holder 
has  delivered  wealth  to  the  community  and  is  entitled  to 
receive  an  equivalent  in  return ;  in  other  words,  they  must 
bear  witness  that  the  holder  is  a  creditor.  Hence,  if  these 
tokens  are  not  acknowledgments  of  debt,  it  would  follow  that 
there  can  be  creditors  where  there  are  no  debtors  (89,  92),  and 
tliis  is  inconceivable. 

But  let  us  see  what  the  advocates  of  the  volume  theory 
have  to  say  to  establish  their  position. 

1 1 6.  Ricardo's  Statement  of  the  Volume  Theory. — It  was 
evidently  considered  superfluous  by  Rieardo  to  offer  any 
demonstration  whatever  of  the  volume  theory.  He  merely 
statf'd  the  proposition  as  though  it  were  self-evident.  In  a 
footnote  he  asserts : 


140  FUNDAMENTAL  CONCEPTS  [117 

That  commodities  would  rise  or  fall  in  price,  in  proportion  to  the 
increase  or  diminution  of  money,  I  assume  as  a  fact  which  is  incon- 
trovertible." 

But  the  fact  is  that  this  assumption  is  inconsistent  with 
his  own  seignorage  theory  (1136).  Ricardo  seems  to  have 
overlooked  that  in  explaining  the  value  of  money  on  the 
seignorage  theory,  and  then  qualifying  this  by  adducing  the 
volume  theory,  he  was  dealing,  as  already  pointed  out  (113a), 
with  two  really  incompatible  propositions.  As  Ricardo  has 
offered  nothing  to  substantiate  the  volume  theory,  there  is  no 
ground  for  further  argument  regarding  his  assertion  on  the 
subject. 

117.  Mill's  Argument.— John  Stuart  Mill  offers  the  fol- 
lowing argument  as  a  demonstration  of  the  volume  theory : 

Let  us  suppose  that  to  every  pound,  or  shilling,  or  penny,  in  the 
possession  of  any  one,  another  pound,  shilling,  or  penny,  were  suddenly 
added.  There  would  be  an  increased  money  demand,'^^  and  consequently 
an  increased  money  value,  or  price,  for  things  of  all  sorts.  This  in- 
creased value  would  do  no  good  to  any  one;  would  make  no  difference, 
except  that  of  having  to  reckon  pounds,  shillings,  and  pence  in  higher 
numbers,  .  .  .  Prices  would  have  risen  in  a  certain  ratio,  and  the 
value  of  money  would  have  fallen  in  the  same  ratio. 

It  is  to  be  remarked  that  this  ratio  would  be  precisely  that  in 
which  the  quantity  of  money  had  been  increased.  If  the  whole  money 
in  circulation  was  doubled,  prices  would  be  doubled.  If  it  was  only 
increased  one-fourth,  prices  would  rise  one  fourth.  .  .  .  The  value 
of  money,  other  things  being  the  same,  varies  inversely  as  its  quantity; 
.  .  .  This,  it  must  be  observed,  is  a  property  peculiar  to  money.  We 
did  not  find  it  to  be  true  of  commodities  generally,  that  every  diminu- 
tion of  supply  raised  the  value  exactly  in  proportion  to  the  deficiency, 
or  that  every  increase  lowered  it  in  the  precise  ratio  of  this  excess. 
Some  things  are  usually  affected  in  a  greater  ratio  than  that  of  the 
excess  or  deficiency,  others  usually  in  a  less:      .     .     .^ 

These  quotations  are  taken  from  the  chapter:  ''Of  the 
Value  of  Money,  as  Dependent  on  Demand  and  Supply." 
This  is  immediately  followed  by  the  chapter:  "Of  the  Value 

"  Ricardo,  p.  326. 

"*  The  author  here  manifestly  means  "  demand  for  other  things  in 
exchange  for  money." 

='»  Mill,  II,  pp.  29  ff.  N 


118]  MONEY  141 

of  Money  as  Dependent  on  the  Cost  of  Production,"  in  which 
the  author  shows  that  the  value  of  money,  "in  a  state  of 
freedom, ' '  conforms  to  the  value  of  the  bullion  it  contains. 

A  pound  weight  of  gold  or  silver  in  coin  and  the  same  weight  in  an 
ingot  will  precisely  exchange  for  one  another.^" 

Thus  he  artlessly  presents  both  the  volume  and  the  com- 
modity theory  together,  although  at  best  only  one  of  them 
can  be  correct.  On  examination  it  will  be  found  that  the 
volume  theory  is  the  one  that  cannot  be  sustained. 

ii8.  Mill's  Reasoning  Analyzed. — In  the  illustration  in 
which  all  men  are  supposed  to  find  the  money  in  their  pos- 
session suddenly  doubled,  the  assumption  that  all  men  would 
thereupon  pay  double  prices  for  everything  they  had  to  buy  is 
by  no  means  self-evident.  Such  is  certainly  not  the  case  with 
people  who  suddenly  get  rich.  While  they  may  spend  money 
more  freely,  buying  things  they  would  not  have  bought  before, 
yet  they  do  not  usually  give  more  money  for  the  goods  they 
buy  than  the  ruling  price  of  the  goods.  The  question  really  is, 
what  would  be  the  ruling  price  of  goods  under  the  conditions 
which  Mill  suggests? 

If  he  intended  to  imply  that  not  only  the  quantity  of  all 
coined  metal  were  doubled,  but  that  the  quantity  of  all 
silver  and  gold  metal  were  increased  two-fold,  and  that  the 
mines  of  these  metals  would  henceforth  be  twice  as  prolific 
by  the  application  of  the  same  amount  of  labor,  and  further- 
more, that  the  usefulness  of  two  ounces  of  the  metals  for  all 
possible  uses  would  henceforth  equal  the  usefulness  that 
formerly  inhered  in  one  ounce,  then  his  conclusion  would  be 
sound.  Prices  would  then  promptly  rise  to  precisely  double 
their  former  level.  But  since  these  conditions  would  bring 
about  a  reduction  of  the  value  of  the  precious  metals  to  one- 
half  of  what  it  was  before,  this  illustration  w^ould  confinn  the 
(•(jmmodity  theory  rather  than  the  volume  theory  of  the 
value  of  money,  for  in  the  absence  of  the  additional  con- 
ditions here  enumerated,  Mill's  conclusion  would  not  stand, 

"'Mill,  H,  pp.  38  ff. 


142  FUNDAMENTAL  CONCEPTS  [ii9 

especially  if  the  production  of  each  ounce  of  gold  and  silver 
would  still  entail  as  much  effort  as  before. 

Those  who  have  money  to  spend  compare  the  effort  to 
acquire  the  money  with  the  gratification  that  can  be  derived 
from  the  goods  to  be  obtained  for  it,  and  if  the  production 
of  the  gold  or  the  silver  of  which  standard  coin  consists 
continues  to  require  the  same  effort  as  before,  there  is  no 
ground  for  Mill's  inference  that  the  estimated  worth  of  a  coin 
would  fall  to  one-half  if  the  number  of  coins  were  doubled. 
No  coin  that  is  legal  tender  ever  passed  current  at  a  value 
below  that  of  the  metal  it  contained,  and  there  is  no  reason  to 
assume  that  it  ever  will. 

119.  Newcomb's  Argument. — More  plausible  is  that  at- 
tempted demonstration  of  the  volume  theory  which  is  clothed 
in  the  garb  of  mathematics.  This  method  has  been  adopted 
and  elaborated  by  quite  a  number  of  recent  writers.  We  shall 
here  take  up  Simon  Newcomb's  presentation  of  the  argument, 
and  since  that  of  others  who  accept  the  volume  theory  is  virtu- 
ally the  same,  the  following  discussion  will  apply  generally. 

The  volume  theory  is  held  to  be  capable  of  mathematical 
demonstration  on  basis  of  the  fact  that  at  each  sale  the  delivery 
of  goods  in  one  direction  is  reciprocated  by  the  delivery  of 
money  of  equal  value  in  the  other.^^  An  equation  exists, 
therefore,  between  the  flow  of  merchandise,  or  the  ''industrial 
flow,"  and  the  circulation  of  money,  or  the  "monetary  flow" 
(245). 

The  monetary  flow  is  represented  by  the  product  V  X  R, 
where  V  is  the  volume  of  currency,  namely  the  number  of 
dollars  in  actual  circulation,  and  R  is  the  average  rapidity 
of  circulation,  namely,  the  average  number  of  times  in  the 
year  that  each  dollar  is  used  as  a  medium  of  exchange. 

In  the  algebraic  representation  of  the  industrial  flow  the 
letter  K  was  chosen  for  the  total  traffic  in  merchandise  and 
services  during  one  year,  but  since  the  total  value  of  this 
traffic  may  rise  or  fall  as  the  price  level  rises  or  falls,  the 
quantity  K,  which  is  supposed  to  be  rendered  in  terms  of 

"  Cf.  Newcomb,  pp.  315-347. 


120]  MONEY  143 

some  invariable  value  unit  (31),  must  be  multiplied  by  the 
coefficient  P  denoting  the  price  level,  in  order  to  obtain  the 
value  of  the  flow  in  terms  of  dollars.  The  letter  P  really 
represents  the  value  of  the  assumed  invariable  unit  in  terms 
of  dollars,  that  is,  the  reciprocal  of  the  purchasing  power  of 
the  dollar  expressed  in  terms  of  this  assumed  unit.  The 
product  P  X  -K"  is,  accordingly,  the  industrial  flow  expressed 
in  terms  of  dollars  (272), 

The  relation  of  the  monetary  to  the  industrial  flow  is  then 
expressed  by  the  equation  (270) : 

In  the  application  of  this  equation  to  prove  the  volume 
theory  it  is  assumed  that  the  annual  traffic  of  merchandise  K, 
as  well  as  the  rapidity  of  monetary  circulation  B,  are  de- 
termined by  industrial  conditions  and  customs  and  can  there- 
fore be  considered  as  constants,  leaving  Y  and  P  the  only 
variables.  If,  then,  the  volume  V  is  changed,  it  would  follow 
that  the  price  level  P  must  vary  directly  as  the  volume  V 
varies;  otherwise  the  equation  would  not  be  satisfied.  New- 
comb  therefore  concludes: 

that  the  rise  in  the  price  P  would  be  proportional  to  the  increase  in  the 
total  volume  V  of  the  currency,^ 

and  this  leads  to  the  proposition  (351)  : 

When  the  volume  of  currency  fluctuates,  other  conditions  being 
equal,  the  purchasing  power  of  each  unit  of  money  varies  inversely  as 
the  whole  number  of  units,  so  that  the  total  absolute  value  of  currency 
remains  unaltered  by  changes  in  that  volume." 

This  is  the  very  essence  of  the  volume  theory.  On  further 
analysis,  however,  Newcomb's  conclusion  will  be  found  to  be 
invalid. 

120.  Newcomb's  Reasoning  Analyzed. — It  is,  of  course, 
neeossary  to  properly  circumscribe  the  compass  of  the  terms 
of  the  erjuation.  In  the  industrial  flow  K  are  to  be  included 
only  such  sales  of  goods  and  services  as  are  settled  sooner  or 

"  Xeweonib,  p.  Mi).         "  Ihid.,  p.  346. 


144  FUNDAMENTAL  CONCEPTS  [120 

later  through  payment  of  money.  Those  sales  which  are 
never  paid  for  must  of  course  be  excluded,  and  where  sales 
and  purchases  are  set  off  against  one  another  and  therefore 
are  virtually  barter,  only  the  balance  of  the  transactions  which 
is  settled  by  actual  payment  of  money  can  be  included  in  the 
factor  K. 

The  monetary  flow  here  considered  must  be  regarded  as 
consisting  only  of  such  payments  as  are  made  for  goods  and 
services,  exclusive  of  all  other  monetary  movements.  While 
the  volume  V  is  to  consist  of  all  the  money  in  use  in  the 
country,  including  both  currency  and  bank  credit  subject  to 
check,  the  quantity  B  must  here  be  computed  on  basis  of  only 
those  movements  of  money  which  make  up  the  monetary  flow 
as  just  defined.  This  precaution  is  necessary,  as  there  are 
monetary  movements  which  cannot  be  included  in  the  present 
considerations.  The  repeated  transfers  of  money  in  the  form 
of  checks  from  bank  to  bank  in  the  course  of  clearance  as 
well  as  the  transfers  of  money  between  lenders  and  borrowers 
constitute  a  flow  of  money  which  is  extraneous  to  sales  or 
commodity  exchanges  of  any  kind  and  which  must  therefore 
be  excluded  from  the  monetary  flow  of  Newcomb's  equation 
(245). 

But  even  with  these  qualifications  the  equation  is  true 
only  if  we  leave  out  of  consideration  the  fact  that  goods 
delivered  and  services  rendered  are  to  a  large  extent  paid  for 
at  various  periods  after  delivery  (270).  Only  a  portion  of 
the  purchases  made  within  a  given  week  are  paid  for  at  the 
time,  while,  on  the  other  hand,  purchases  made  months  before 
may  be  paid  within  the  week  in  question.  It  cannot,  there- 
fore, be  said  that  within  any  one  week,  month  or  year  the 
industrial  flow  must  equal  the  monetary  flow. 

When  taken  with  the  qualifications  above  indicated,  the 
equation  itself  is  beyond  dispute.  But  the  same  cannot  be 
said  of  the  conclusions  derived  from  it.  It  is  inadmissible 
to  assume  the  quantities  K  and  R  to  be  independent  of  the 
volume  V,  for  it  can  be  shown  that  it  is  the  price  level  P 
which  is  independent  of  V. 

But  let  us  follow  Newcomb  's  logic. 


120]  MONEY  145 

He  first  argues  that  the  rapidity  B  of  the  monetary  circu- 
lation, although 

not   fixed  by   any   precise   law,     .     .     .     j'et   can   only   change   between 
very  narrow  limits.^ 

He  clearly  shows  that,  by  reason  of  certain  business  cus- 
toms and  of  the  practice  of  paying  wages  and  salaries  at 
stated  periods,  the  rapidity  of  circulation  cannot  materially 
exceed  a  certain  rate,  and  to  show  that  it  will  never  be  much 
less  than  this  rate,  he  says : 

Every  man  feels  that  he  is  losing  possible  interest  on  his  money 
by  keeping  it  and  therefore  tries  to  pay  it  out  for  something  as  soon  as 
he  advantageously  can.^" 

This  statement  requires  qualification.  There  exists  a  well 
defined  and  widely  prevalent  reluctance  to  pay  out  money, 
and  a  corresponding  desire  to  hold  on  to  it  for  use  in  possible 
emergencies.  Beyond  that,  there  is  a  tendency  to  put  out 
money  at  interest,  either  through  the  purchase  of  bonds, 
mortgages  and  so  forth,  or,  as  is  the  case  with  the  vast  number 
of  minor  traders  and  wage  earners,  to  place  it  at  interest  in 
savings  banks.  But  it  is  only  the  disbursements  of  money 
for  goods  or  services,  and  not  the  putting  out  of  money  in  any 
form  of  loan,  which  makes  up  the  rapidity  E,  for,  as  we  have 
just  observed,  the  movements  of  money  between  lenders  and 
borrowers  must  be  excluded  from  consideration  in  Newcomb  's 
equation.  While  there  is  unquestionably  a  superior  limit  to 
the  rapidity  of  circulation,  though  not  sharply  defined,  there 
can  be  no  inferior  limit.  While  the  rapidity  cannot  well  ex- 
ceed a  certain  rate,  there  is  no  obvious  reason  why  it  cannot 
fall  considerably  below  this  maximum.  In  the  course  of  our 
investigation  we  shall  learn  the  reason  why  this  rapidity  is  at 
present  maintained  near  its  higliest  possi])le  rate   (291). 

Regarding  the  volume  of  traffic,  Newcomb  argues  in  brief 
as  follow??: 

The  societary  circulation,  or  volume  of  traffic  A",  depends 
upon  the  volume  of  production,  which,  in  turn,  is  limited  by 

»*  Newcomb,  p.  342.  " /?)iU,  ]>.  324. 

10 


146  FUNDAMENTAL  CONCEPTS  [120 

the  increasing  irksomeness  of  work  as  the  daily  time  of  labor 
is  increased.^" 

At  a  later  point  he  remarks  in  this  connection : 

As  a  general  rule  the  actual  exchanges  will  not  vary  rapidly  so 
long  as  things  go  on  in  their  regular  way.  ...  As  already  shown, 
there  is  a  certain  amount  of  these  transactions  which  is  most  ad- 
vantageous, and  in  which  everything  goes  on  as  nearly  as  possible  to 
every  one's  satisfaction.^' 

The  postulate  that  the  volume  of  traffic  K  depends  on  the 
volume  of  production  requires  qualification,  inasmuch  as  traffic 
may  increase  or  decrease  independently  of  the  amount  of  the 
goods  that  are  produced.  The  same  product  may  be  sold 
repeatedly,  entailing  a  corresponding  increase  of  the  traffic. 
Through  improvements  in  the  arts  which  bring  about  a  more 
minute  specialization  in  the  methods  of  production,  products 
will  enter  into  traffic  a  greater  number  of  times  on  their  way 
to  maturity,  and  while  each  transfer  in  the  course  of  pro- 
duction adds  to  the  volume  of  that  traffic  which  entails 
monetary  circulation,  it  does  not  add  to  the  volume  of  the 
final  products  (121).  Hence  there  is  no  superior  limit  to 
this  flow,  unless  we  assume  that  we  have  reached  the  acme 
of  industrial  progress.  Nor  is  there  an  inferior  limit,  for 
we  know  that  during  periods  of  business  stagnatioai  not 
everything  is  going  on  to  every  one's  satisfaction,  and  the 
industrial  flow  is  very  much  less  than  what  is  most  desirable 
for  the  well-being  of  men. 

It  is  therefore  manifest  that  there  is  no  valid  basis  for 
the  assumption  that  the  quantities  R  and  K  are  constant 
terms  of  the  equation  and  accordingly  independent  of  the 
money  volume  V.  Nor  can  the  assumption  that  the  price 
level  P  is  dependent  on  the  volume  V  be  logically  sustained. 
It  is  indeed  wholly  inconsistent  with  the  teachings  of  the 
same  author  in  an  earlier  part  of  his  treatise.  In  the  dis- 
cussion of  gold  money  he  clearly  demonstrates  that  the  value 
of  the  gold  contained  in  the  money  is  that  which  imparts 
value  to  it.     In  his  elaboration   of  the  volume   theory  he 

^«  Of.  Newcomb,  p    330.  ''  Ihid.,  p.  342. 


121]  MONEY  147 

reaches  the  conclusion  that  "paper"  money  obtains  its  value 
from  a  radically  diflt'erent  source  and  that  it  is  the  volume  of 
currency  that  determines  its  value. 

Since  it  is  clearly  improper  to  consider  R  and  K  to  be  con- 
stant factors  of  the  equation  stated,  and  P  to  be  a  variable 
factor  in  it,  the  conclusions  based  on  these  assumptions  are 
untenable. 

121.  Valid  Deductions  from  Newcomb's  Equation. — It  is 
to  be  observed  that  the  volume  theory  is  advanced  only  in 
discussions  of  the  subject  of  "paper  money,"  and  never  when 
standard  coin  is  the  theme.  The  volume  theory  was  probably 
conceived  in  an  effort  to  account  for  the  fact  that  the  current 
value  of  credit  money  exceeds  the  value  of  the  substance  of 
which  the  tokens  are  made,  and  since  gold  coin  does  not 
exhibit  this  feature,  there  would  appear  to  be  no  need  of 
introducing  the  volume  theory  when  the  value  of  standard 
money  is  the  subject  of  discussion. 

But  let  us  examine  the  efifect  which  a  change  of  the 
volume  of  gold  money  has  on  its  value.  Suppose  that  the 
total  existing  supply  of  gold  for  both  industrial  and  monetary 
use  be  equal  to  OQ  of  the  diagram  Fig.  11,  and  that  the 
portion  OV  of  this  gold  had  been  taken  for  monetary  use. 
If  the  volume  of  gold  money  were  now  to  be  increased,  it 
would  1)0  necessary  to  transfer  more  gold  from  the  industrial 
to  the  financial  field,  increasing  the  volume  of  gold  money  at 
the  expense  of  the  stock  of  gold  in  the  general  market.  The 
point  V  would  thereby  be  shifted  toward  the  point  Q,  and 
the  market  value  of  gold  would  rise,  that  is  to  say,  the 
general  price  level  would  fall,  a  conclusion  which  is  in  direct 
opposition  to  the  volume  theory.  It  therefore  follows  that 
this  theory,  if  it  is  at  all  valid,  can  apply  only  to  credit 
money. 

The  only  logical  derivations,  then,  to  which  Newcomb's 
equation  lends  itself,  ai-c  the  following: 

Any  increase  of  the  volume  of  credit  money  will,  if  any- 
thing, increase  the  demand  for  gold,  because  of  the  greater 
quantity  of  tin'  iintal  rccjiiircd  in  I'esorve.  H'his  increase  of 
demand   would   naturally  cause  an   incrc;i.se   in  the  value  of 


148  FUNDAMENTAL  CONCEPTS  [121 

gold,  which  means,  of  course,  a  fall  in  the  general  price  level, 
instead  of  the  rise  that  should  take  place  according  to  the 
volume  theory  (239). 

It  may,  however,  be  tentatively  assumed  that  this  influ- 
ence is  negligible  and  that  the  value  of  the  precious  metals 
remains  unaffected  by  changes  in  the  volume  of  credit  money. 
The  factor  P  of  the  equation  remains  accordingly  constant, 
and  if  the  volume  V  is  changed,  only  the  factors  B  and  K  can 
respond  to  such  change. 

Let  us  suppose,  to  begin  with,  that  the  volume  V  is  in- 
creased. The  price  level  P  remaining  practically  unchanged, 
the  result  will  be  a  decrease  of  the  rapidity  of  circulation  R, 
or  an  increase  of  the  traffic  K,  or  both.  If  the  flow  E  is  not 
increased,  then  there  will  be  more  money  for  the  same  amount 
of  business;  every  dollar  will  have  less  work  to  do  and  will 
not  go  round  so  fast.  But  if  the  traffic  is  increased — which 
does  not  necessarily  imply  an  increase  of  the  products  taking 
part  in  the  flow,  as  it  may  also  be  due  to  multiplied  transfers 
in  the  course  of  increased  specialization  in  production  (120) 
— the  rapidity  R  may  remain  the  same  as  before. 

Let  us  suppose  that  on  the  other  hand  the  volume  V  is 
reduced.  This  would  have  the  effect  of  either  increasing  the 
rapidity  R  or  of  reducing  the  traffic  E. 

But  the  rapidity  of  the  monetary  circulation  cannot  be 
materially  increased,  inasmuch  as  under  existing  conditions 
it  is  always  at  or  near  its  practical  maximum  (291).  There- 
fore the  only  result  which  would  follow  a  reduction  of  the 
volume  V  would  be  a  corresponding  reduction  of  the  flow  E, 
in  other  words,  a  cutting  down  of  the  amount  of  business.  We 
have  indeed  ample  evidence  on  every  side  that,  whatever  the 
volume  of  traffic  may  be,  it  is  rarely,  if  ever,  up  to  the  existing 
capacity  of  production.  Not  only  are  producers  constantly 
seeking  new  markets  for  their  surplus  products  and  clamoring 
for  protection  of  the  home  market  against  outside  competition, 
but  a  condition  of  enforced  idleness  among  producers  is  fre- 
quently manifest.  The  most  significant  conclusion  derivable 
from  Newcomb's  equation  is  that  a  restriction  of  the  volume 
of  money,  instead  of  preventing  an  inflation  of  prices,  really 


122]  MONEY  149 

prevents  an  expansion  of  business,  and  this  conclusion  will 
find  confirmation  from  other  points  of  view  further  on  in  our 
discussion  (270), 

The  equation  of  industrial  and  monetary  circulation  mani- 
festly fails  to  prove  that  prices  rise  or  fall  in  the  proportion  in 
which  the  volume  of  money  is  increased  or  reduced. 

122.  The  Volume  Theory  in  the  Light  of  History. — From 
a  purely  theoretical  standpoint  the  volume  theory  clearly 
lacks  proof.  But  it  may  perhaps  appear  to  be  substantiated 
by  experience,  by  history,  by  facts.  The  question  to  be  de- 
tennined  is  this:  Is  there,  or  has  there  been,  a  "money  unit" 
which  differs  in  value  from  the  adopted  "commodity  unit?" 
With  reference  to  standard  money  this  question  takes  the  form : 
Can  the  value  of  standard  coin  fall  below  or  rise  above  the 
value  of  the  metal  it  contains?  And  with  reference  to  credit 
money  it  takes  this  form :  Can  a  money  token  redeemable  in  a 
stated  amount  of  gold  have  a  value  different  from  that  amount 
of  gold?  In  short,  can  a  "dollar"  be  anything  else  t;han  the 
stated  amount  of  the  standard  commodity? 

Let  us  test  this  question  in  the  light  of  history. 

Since  the  resumption  of  specie  pajTiient  in  1879  the  value 
of  one  dollar  of  currency  and  the  value  of  23.22  grains  of 
pure  gold  have  remained  equal.  The  trifling  fluctuation  of 
gold  in  the  London  market,  in  which  the  value  of  gold  bullion 
is  never  above  the  value  of  the  coined  metal,  does  not  prove 
the  contrary,  for  reasons  presented  before  (109).  There  can 
be  no  doubt  that  the  value  of  the  metal  gold  follows  the  same 
law  of  supply  and  demand  that  determines  the  value  of  other 
commodities,  and  if  the  value  of  the  dollar  were  determined, 
not  by  supply  and  demand  of  gold,  but  by  supply  ajid  demand 
of  money,  the  continued  parity  above  noted,  notwithstanding 
the  fluctuations  to  which  both  are  constantly  subject,  would  cer- 
tainly be  a  case  of  most  remarkable  coincidence. 

However,  this  continued  parity  of  currency  with  gold  is 
held  to  be  explained  on  the  basis  of  the  volume  theory  as 
follows : 

Suppose  that  in  a  country  in  which  the  amount  of  money 
required  by  its  commerce  is  fully  supplied  by  standard  coin. 


150  FUNDAMENTAL  CONCEPTS  [122 

a  certain  amount  were  added  to  the  currency  in  the  form  of 
paper  money.  The  volume  of  money  being  thereby  increased, 
the  value  of  the  dollar  would  be  correspondingly  reduced.  The 
value  of  the  coined  metal,  in  its  capacity  as  money,  being  then 
less  than  the  value  of  the  same  metal  as  a  commodity,  coin 
would  be  withdrawn  from  circulation  and  the  gold  turned  into 
the  market  as  merchandise.  As  the  A'olume  of  money  would 
thereby  be  reduced,  the  original  value  of  the  dollar  would  be 
restored  as  soon  as  the  amount  of  coin  withdrawn  would  equal 
the  amount  of  paper  money  previously  added,  and,  for  the 
time  being,  a  further  diversion  of  the  coined  gold  into  the 
industrial  market  would  come  to  a  stop. 

Each  new  addition  of  paper  money  would  have  a  like  effect, 
until  all  gold  is  displaced  by  an  equal  amount  of  paper  money. 
Should  the  infiltration  of  paper  money  into  the  system  of  cur- 
rency be  still  further  continued,  one  of  two  things  would 
happen.  If  the  notes  were  of  the  redeemable  kind,  their  re- 
duced value  for  money  purposes  would  result  in  notes  being 
presented  for  redemption,  and  in  the  gold  so  obtained  being 
diverted  into  the  market  where  its  value  is  greater,  Plence 
there  would  again  follow  a  reduction  of  the  volume  of  currency 
to  the  original  amount,  namely  the  amount  required  by  the 
commerce  of  the  country.  But  if  the  notes  should  be  of  the 
inconvertible  kind,  the  depreciation  of  the  dollar  due  to  the 
increased  volume  of  currency  would  persist ;  in  other  words, 
prices,  in  obedience  to  the  volmne  theory,  would  permanently 
rise.^^ 

This  argument  is  put  forth  to  elucidate  how  it  is  that,  so 
long  as  there  is  no  excessive  issue  of  "inconvertible"  notes, 
the  dollar  of  currency  is  maintained  at  parity  with  23.22 
grains  of  pure  gold,  notwithstanding  that  the  value  of  gold  is 
determined  by  its  own  supply  and  demand,  while  that  of  the 
dollar  is  determined  by  the  supply  and  demand  of  money.  It 
is  averred  that  whenever  the  value  of  the  dollar  of  money 
rises  above  the  value  of  23.22  grains  of  gold,  it  would  become 
profitable  to  convert  gold  into  money  by  bringing  it  to  the 

="  Vf.  Mill,  II,  p.  89  ff.,  and  Newcomb,  pp.  413  ff. 


123]  MONEY  151 

mint,  until  the  resulting  reaction  would  restore  parity.  And 
whenever  the  value  of  the  dollar  of  money  were  to  fall  below 
the  value  of  23.22  grains  of  gold,  a  melting  down  of  coin  would 
ensue  until  parity  is  restored. 

123.  The  Volume  Theory  Inconsistent  With  Facts. — The 
above  account  of  what  happens  when  "paper  money"  is  added 
to  the  existing  currency  is  not  in  accord  with  experience.  The 
market  price  of  gold  bullion,  if  it  differs  at  all  from  the  coin- 
age value  of  gold,  is  invariably  below,  but  never  above  the 
latter  (109).  The  assumption  that  the  value  of  standard  coin 
can  fall  below  the  market  value  of  gold  is  totally  unwarranted. 
A  general  disposition  to  melt  down  standard  coin  has  never 
been  observed  to  attend  the  issue  of  redeemable  paper  money. 
Coin  has  disappeared  from  circulation  only  when  paper  money 
was  put  out  without  provision  for  its  redemption,  resulting  in 
its  depreciation.  And  under  these  circumstances  the  coin  did 
not  disappear  gradually,  as  more  paper  money  was  being- 
issued,  but  practically  all  at  once.  The  reason  is  obvious. 
"When  debtors  are  free  to  pay  their  debts  in  any  of  several 
ways,  they  naturally  choose  the  easiest  (112).  Hence  only  the 
least  valuable,  the  depreciated  currency,  remains  in  circulation. 
The  oft-quoted  and  frequently  misapplied  "Gresham  law"  is 
really  a  formulation  of  the  fact  that  debtors  naturally  select 
the  easiest  mode  of  payment,  if  they  have  the  legal  right  to  pay 
their  debts  in  more  than  one  way. 

If  it  were  true  that  the  purchasing  power  of  the  dollar  de- 
pended upon  the  demand  for  and  the  supply  of  money,  there 
would  be  no  need  for  adopting  a  value  unit  consisting  of 
either  gold  or  silver.''"  We  know,  however,  that  every  unit, 
whatever  its  origin,  whether  the  outgrowth  of  custom,  the 
result  of  convention,  or  the  edict  of  authority,  must  be  some- 
thing more  substantial  than  a  mere  name  and  must  somehow 
and  somewhere  have  its  magnitude  definitely  and  authorita- 
tively recorded  in  order  that  it  may  serve  its  purpose.  But 
according  to  the  volume  theory  the  measure  of  the  unit  of 

""This  corollary  of  the  volume  theory  has  been  made  the  basis  of 
many  schemes  of  fiat  money,  some  of  which,  as  history  records,  have 
boon  piit  in  practice  witli  disastrous  consequences. 


152  FUNDAMENTAL  CONCEPTS  [i«3 

value  automatically  adapts  itself  to  circumstances,  and  this  is 
unreasonable  on  its  face.  And,  moreover,  that  theory  sug- 
gests nothing  to  throw  light  on  the  source  of  the  value  of 
paper  money  which,  so  far  as  it  exists,  must  be  traceable  to 
wealth  held  by  some  debtor  (68-69,  92).  It  is  no  more  reason- 
able to  assume  that  value  can  be  infused  into  paper  money 
merely  by  the  need  for  a  medium  of  exchange,  than  it  would 
be  to  suppose  that  utility  can  be  developed  in  nature's  raw 
products  by  the  mere  need  of  men  for  useful  things.  Paper 
money  cannot  acquire  its  value  from  the  coin  it  displaces,  for 
the  metal  of  coins  so  displaced  goes  back  into  the  industrial 
market  and  does  not,  like  that  underlying  gold  certificates, 
remain  segregated  as  a  pledge  of  the  paper  money. 

The  idea  that  paper  money  can  have  a  value  apart  from 
the  wealth  or  credit  which  underlies  it  is  quite  on  a  par  with 
MacLeod's  notion  that  wealth  is  created  whenever  a  credit 
instrument  is  issued ;  but,  as  we  have  seen  (70),  this  assumption 
is  unreasonable. 

The  volume  theory  can  be  scrutinized  from  another  point 
of  view.  If  the  value  of  money  is  now  inversely  proportional 
to  its  volume,  it  must  be  possible  to  show  how  and  when  that 
relation  was  first  developed.  Our  review  of  the  evolution  of 
money  (107)  is  in  every  way  borne  out  by  historical  records 
which  show  that  in  the  early  stages  of  that  evolution  the 
value  of  money  was  neither  more  nor  less  than  the  value  of 
the  commodity  used  as  money.  And  when  paper  money,  such 
as  the  certificates  of  the  goldsmiths,  came  to  take  the  place 
of  the  commodities  previously  in  use,  the  value  of  that  money 
was  still  dependent  on  the  value  of  the  commodity  to  which 
those  paper  tokens  conveyed  a  claim.  The  collapse  of  so  many 
historic  schemes  of  credit  money  was  invariably  due  to  the 
failure  of  the  issuers  to  recognize  the  money  tokens  as  acknowl- 
edgments of  debt  which  must  be  directly  or  indirectly  redeem- 
able in  actual  wealth  or  valuable  services  and  which,  in  order 
that  redemption  be  assured,  must  be  fully  secured  by  wealth 
possessed  by  the  issuer. 

If  it  were  true  that  the  value  of  money  is  now  determined 
in  some  other  way,  there  must  have  been  some  time  when  the 


1241  MONEY  153 

remarkable  change  took  place  by  which  the  value  of  money, 
instead  of  being  dependent  on  the  value  of  the  metal  of  which 
it  was  composed,  or  of  the  wealth  in  which  it  was  redeemable, 
became  dependent  on  the  amount  of  money  in  circulation. 
"When  did  money  cease  to  be  either  an  already  existing  com- 
modity used  as  a  go-between,  or  a  certificate  conveying  a  claim 
against  its  issuer  ?  At  what  point  of  its  historic  evolution  did 
money  become  a  specific  commodity,  the  value  of  w^hich  was 
regulated  by  the  supply  of  and  the  demand  for  a  medium  of 
exchange?  Unless  it  can  be  shown  how  and  when  this  meta- 
morphosis took  place,  we  must  conclude  that  the  volume  theory 
of  the  value  of  money  has  neither  an  economic  nor  an  historic 
basis. 

The  notion  that  the  value  of  the  "money  unit"  depends 
upon  supply  and  demand  of  money  is  clearly  traceable  to  a 
misinterpretation  of  the  so-called  "law  of  supply  and  de- 
mand," the  very  name  of  which  is  misleading  (63). 

124.  Seeming  Confirmations  of  the  Volume  Theory. — 
AYhenever  credit  currency  is  in  circulation  at  a  depreciated 
value  by  reason  of  the  deficient  credit  of  the  issuing  power,  it 
is  easy  to  see  that  an  increase  of  its  volume  will  be  followed 
by  a  further  depreciation  (239).  Repeated  experiences  of 
this  kind  have  conclusively  proven  the  dependence  of  the 
value  of  such  money  on  its  volume.  It  is  therefore  not  diffi- 
cult to  understand  how  men  like  Hume,  Ricardo,  Mill,  New- 
comb,  and  many  others,  who  lived  during  times  of  such  ex- 
periences, should  have  regarded  the  volume  of  money  as  one 
of  the  determinating  factoi-s  of  its  value.  They  simply  at- 
tributed the  rise  of  prices  following  an  increased  issue  of 
such  notes  to  an  increase  of  the  volume  of  money  as  such, 
when  it  was  really  due  to  an  increase  of  the  volume  of  money 
tokens  without  a  corresponding  addition  to  the  money  sub- 
stance. The  result  of  such  issue  is  simply  that  the  same 
amount  of  the  substance  is  spread  out  among  a  greater  number 
of  claimants  for  it.  They  mistook  an  increase  of  money  tokens 
for  an  increase  of  money  substance. 

In  further  support  of  the  volume  theory  the  fact  is  often 
cited  that  prices  have  risen  whenever  the  quantity  of  the 


154  FUNDA^IENTAL  CONCEPTS  [125 

precious  metals  in  the  markets  of  the  world  suddenly  in- 
creased. Thus  the  epoch  following  the  discovery  of  America, 
when  large  quantities  of  gold  and  silver  were  brought  to 
Spain  from  the  new  world,  and  that  following  the  discovery 
of  gold  in  California,  were  characterized  by  a  general  rise  in 
prices.  But  these  facts  are  in  harmony  with  the  commodity 
theory  of  the  value  of  money  and  cannot,  therefore,  be  cited 
as  demonstrating  the  volume  theoiy  in  particular. 

125.  Minor  Discrepancies  of  the  Volume  Theory. — In 
addition  to  the  points  already  presented  there  are  stiU  other 
reasons  which  can  be  adduced  to  show  the  unsoundness  of  the 
volume  theory.  With  the  mention  of  a  few  of  them  we  shall 
conclude  the  discussion  of  this  subject. 

If  the  value  of  currency  tokens  were  in  reality  due  to 
their  usefulness  as  a  medium  of  exchange,  there  would  mani- 
festly be  no  need  to  make  any  of  the  tokens  of  a  precious 
metal.  Since  nevertheless  some  of  those  tokens  are  made  of 
gold,  these  would  naturally  have  a  higher  value  than  those 
made  of  baser  metal,  for  the  same  reason  that  a  watch  case  of 
gold,  although  no  more  useful  than  one  of  brass,  yet  has  a 
higher  value. 

Furthermore,  when  business  becomes  stagnated  and  traffic 
reduced,  there  is,  according  to  the  logic  of  the  volume  theory, 
a  reduced  demand  for  money.  This  would  cause  a  fall  in  the 
value  of  money,  that  is,  a  rise  in  prices.  But  it  is  known  from 
experience  that  the  reverse  is  the  case. 

If  it  were  true  that  the  changes  in  the  purchasing  power  of 
the  dollar  depend  on  nothing  but  the  three  factors :  volume  of 
money,  volume  of  traffic  and  rapidity  of  circulation,  so  that 
the  existing  volume  of  money,  through  changes  of  the  price 
level,  always  sufficed  to  meet  the  requirements  of  the  entire 
traffic,  in  other  words,  if  it  were  true  that  in  the  equation : 

the  factor  P  always  automatically  adjusted  itself  to  the  other 
three  factors,  the  supply  of  money  could  never  fall  short  of 
the  demand.  But  it  is  well  known  that  during  periods  of 
financial  stringency  the  supply  of  money  is  decidedly  below 


1^5]  MONEY  155 

the  demand,  showing  that,  as  a  matter  of  fact,  the  price  level 
does  not  adapt  itself  to  the  needs  of  commerce  and  that  at 
times  the  demand  for  money  to  balance  accounts  arising  from 
the  preceding  "industrial  flow"  goes  far  beyond  the  supply 
of  money  (239).  The  very  fact  that  there  are  financial  crises 
disproves  the  volume  theory. 

It  is  remarkable  that  this  untenable  doctrine  still  exerts  so 
potent  an  influence  on  monetary  policy.  It  is  not  that  coin 
and  certain  credits  have  value  because  they  are  used  as  a 
medium  of  exchange,  but,  on  the  contrary,  they  are  usable  as 
a  medium  of  exchange  because  they  have  value.  Money  does 
not  owe  its  value  to  the  demand  for  a  medium  of  exchange,  nor 
to  any  law  authorizing  the  issue  of  such  medium,  but  ex- 
clusively to  the  value  of  that  of  which  the  money  consists,  be 
it  the  standard  commodity  gold,  or  credit  expressed  in  terms 
of  that  commodity  (69,  107). 


PART  II 

DISTRIBUTION  OF  WEALTH 


CHAPTER  VII 

THE  PROCESS  OF  APPORTIONTMENT 

126.  Statement  of  the  Problem. — In  primitive  society, 
where  each  man  produces  that  which  he  consumes,  there  is 
no  need  for  any  apportionment;  and  where  cooperative  pro- 
duction exists  only  in  the  crudest  fonns,  the  fruit  of  labor  can 
usually  be  shared  directly  among-  those  who  have  helped.  But 
where  the  processes  of  industry"  and  commerce  are  specialized, 
the  division  of  the  value  produced  among  the  various  producers 
becomes  more  complicated.  To  be  sure,  the  method  of  ap- 
portionment is  simple  enough,  for  it  consists  in  selling  the 
things  produced  and  sharing  the  proceeds  of  the  sale,  but  how 
the  various  shares  are  determined  is  the  question  now  before  us. 

In  the  modern  system  of  production  labor  is  specialized  to 
such  an  extent  that,  as  a  rule,  any  one  individual  performs 
only  a  small  part  of  the  work  necessary  to  produce  a  given 
thing.  The  labor  of  many  enters  into  the  production  of  almost 
every  article,  and  the  recompense  of  all  those  so  contributing 
must,  in  the  last  analysis,  be  derived  from  the  returns  received 
from  the  consumer  of  the  final  product.  While  the  portion 
accruing  from  any  one  article  to  any  one  of  the  contributors 
may  be  very  small,  the  volume  of  production  readily  accounts 
for  the  aggregate  income  of  each  producer. 

If  we  were  to  attempt  to  trace  the  currents  of  the  distribu- 
tion in  detail,  we  would  soon  be  lost  in  a  bewildering  maze  of 
ramifications.  But  through  it  all  there  are  apparently  at  work 
some  dominant  economic  forces  that  regulate  the  apportion- 
ment, and  it  remains  for  us  to  study  the  actions,  reactions  and 
interactions  of  these  forces  as  they  come  into  play  in  the  course 
of  the  process  of  production  and  the  division  of  the  products. 

127.  Modern  Industrial  Methods. — In  the  processes  of 
production  practically  all  goods  pass  through  a  series  of  inter- 
mediate stages  between  the  natural  state  of  the  materials  and 
that  of  the  finished  products,  in  each  of  which  the  products 

159 


160  DISTRIBUTION  OF  WEALTH  [127 

appear  as  articles  of  merchandise,  as  for  instance  wool,  yam, 
cloth,  coats.  Each  change  from  one  stage  to  the  next  is 
effected  by  effort  applied  in  some  special  process  or  operation, 
sometimes  performed  by  a  single  worker,  but  more  often  by  a 
group  of  cooperative  workers  (211). 

The  several  processes  by  which  production  is  accomplished 
may  be  consecutive  or  collateral.  Consecutive  processes  may 
be  exemplified,  in  the  case  of  making  a  coat,  by  sheep  raising, 
shearing,  baling  of  the  wool,  transporting,  spinning,  dyeing, 
weaving,  sewing  and  selling.  But  numerous  collateral  proc- 
esses are  equally  necessary.  For  producing  a  coat  the  sewing 
thread,  the  buttons,  the  lining  are  required;  the  chemicals 
for  dyeing  must  be  prepared ;  the  various  machines  for  baling, 
spinning,  weaving  and  sewing  must  be  built ;  means  for  carry- 
ing the  wool  to  the  factory  and  the  cloth  to  the  tailor  are  also 
necessary.  The  enumeration  of  collateral  operations  might  be 
continued  almost  indefinitely,  and  every  contributing  group  is 
entitled  to  its  share  of  the  value  of  the  finished  product.  But 
even  so,  we  have  not  come  to  the  end  of  our  analysis.  As 
already  stated,  each  of  these  operations  is  usually  effected  by 
a  group  of  individuals  who  work  in  cooperation  toward  a  com- 
mon end,  each  one  performing  a  different  task.  In  these 
groups  we  find  employers  and  employed,  landlords  and  cap- 
italists, who,  together  with  the  contributing  groups,  obtain 
their  respective  incomes  through  the  sale  of  the  products  and 
the  sharing  of  the  proceeds. 

This  analysis  of  the  modern  system  of  production  suggests 
the  line  we  must  pursue  in  studying  the  apportionment  of  in- 
comes. We  have  to  learn  how  the  proceeds  from  the  sale  of 
the  final  products  are  shared  among  the  several  groups  which 
perform  the  various  operations  of  production,  and  then,  how 
these  .shares  are  divided  within  each  group  among  its  individual 
members  (151,  154). 

In  order  to  clearly  understand  what  it  is  that  determines 
the  relation  of  the  respective  shares  we  must  first  become  ac- 
quainted with  the  several  factors  of  production,  with  the 
organization  of  productive  groups  and  with  the  principal  forces 
which  come  into  play.     Among  the  factors  of  production, 


128.  129]    THE  PROCESS  OF  APPORTIONMENT  161 

namely  labor  and  capital,  it  is  particularly  the  nature  and 
function  of  capital  with  which  we  should  make  ourselves 
familiar.  Since  the  organization  of  productive  groups  should 
here  be  studied  in  relation  to  the  distribution  of  wealth,  an 
analysis  of  that  organization  may  well  be  preceded  by  a 
classification  of  the  various  shares  into  which  the  value  of  the 
total  product  is  divided.  A  subsequent  study  of  the  forces 
which,  as  factors  of  competition,  are  active  in  governing  the 
division  of  that  value  will  prepare  the  ground  for  a  clear 
understanding  of  the  processes  through  which  that  division  is 
effected. 

128.  The  Factors  of  Production. — Labor  is  the  only  active 
factor  in  the  process  of  production,  but  it  is  quite  generally 
held  that  land,  capital  goods  and  money  are  to  be  classed  as 
productive  factors,  especially  as  it  is  known  that,  like  labor, 
they  command  a  share  of  the  value  produced.  There  are,  how- 
ever, some  writers  who  argue  that  since  land  furnishes  gratui- 
tously the  material  for  all  our  wealth,  and  capital  goods  are 
the  result  of  labor  applied  to  land,  labor  should  be  the  only 
factor  recognized  as  a  productive  agent.  In  view  of  this  con- 
troversy regarding  the  respective  functions  of  land,  capital 
goods  and  money  in  the  process  of  production,  the  nature  and 
function  of  these  factors  should  be  subjected  to  full  ex- 
amination, 

129,  What  is  Capital? — For  the  purpose  of  learning  the 
precise  nature  of  the  service  which  capital  renders  in  the 
processes  of  production  and  for  which  it  obtains  a  share  of 
the  product,  we  must  get  a  clear  idea  of  what  is  to  be  defined 
as  "capital." 

As  popularly  applied,  this  term  has  remained  compara- 
tively free  from  ambiguity.  It  is  oidy  at  the  hands  of  academic 
analysts  that  different  meanings  have  been  attached  to  the 
t<'rm.  In  business  parlance  capital  is  that  portion  of  wealth 
which  is  employed  in  the  processes  of  production  and  exchange 
and  so  "cams"  a  revenue.  Through  being  utilized  l)y  a  group 
of  workers,  wealth  renders  a  service  for  which  it  obtains  a 
11 


162  DISTRIBUTION  OF  WEALTH  [130 

return,  and  it  is  this  apparent  earning  power  which  dis- 
tinguishes "capital"  from  mere  wealth  (267,  319). 

This  conception  of  "capital"  is  embraced  in  the  definitions 
advanced  by  Adam  Smith  and  by  Jean  Baptiste  Say.  Accord- 
ing to  Smith,  capital  is  that  part  of  a  man's  wealth  which  he 
expects  to  afford  him  a  revenue.  Say  considers  the  term  to 
embrace  all  pre-existing  requisites  to  production. 

130.  Land,  a  Form  of  Capital. — After  Ricardo  had  pro- 
mulgated his  law  of  rent  (172),  some  writers  thought  it  de- 
sirable to  exclude  land  from  the  compass  of  the  term  "capital." 
It  appeared  that  the  line  of  reasoning  by  which  the  power  of 
land  to  return  rent  was  explained  was  not  applicable  to  explain 
the  power  of  other  forms  of  w^ealth  to  return  revenue.  This 
led  John  Stuart  Mill  to  confine  the  term  to  that  portion  of  the 
accumulated  produce  of  labor  which  is  utilized  for  further 
production.*"  When  capital  is  so  defined,  land  is  obviously 
excluded,  not  being  a  product  of  labor. 

This  constitutes  a  departure  from  the  popular  conception 
of  the  word.  The  capital  of  a  mining  corporation,  or  of  a 
railway  company,  or,  indeed,  of  any  business  concern  owning 
real  estate,  includes  land  as  well  as  all  other  forms  of  capital 
owned  by  the  company.  But  Mill  evidently  recognized  that 
the  "capital"  of  the  business  world  contains  various  classes 
of  things  that  are  economically  heterogeneous,  and  he  thought 
it  proper  to  separate  them  so  as  to  clear  the  field  for  a  theory 
that  was  to  account  for  interest. 

However,  this  definition  did  not  seem  to  satisfy  him,  for 
he  qualifies  and  modifies  it  by  copious  illustrations  and  finally 
concludes : 

All  funds  from  which  the  possessor  derives  an  income,  which  in- 
come he  can  use  without  sinking  and  dissipating  the  fund  itself,  are  to 
him  equivalent  to  capital." 

This  conception  of  capital  is  manifestly  at  variance  with 
Mill's  primary  definition,  for  funds  can  be  invested  in  land 
as  well  as  in  other  ways.  It  appears  that  he  could  not  divest 
himself  of  the  conviction  that  the  faculty  of  wealth  to  earn 
a  revenue  is  that  which  makes  it  '  *  capital. ' ' 

*-  Cf.  Mill,  I,  p.  83.  "  Ibid.,  1,  p.  89. 


131.  I3i]   THE  PROCESS  OF  APPORTIONMENT  163 

But  with  land  excluded  from  the  category  of  "capital," 
the  temi  still  denotes  two  different  classes  of  things,  namely 
capital  goods  and  money  (134,  203).  The  essential  difference 
between  the  two  latter  is  seldom  given  diie  consideration,  it 
being  generally  held  that  money  commands  interest  because 
capital  goods,  obtainable  for  the  money,  afford  a  revenue 
(138),  while  in  reality  the  interest  commanding  power  of 
money  has  an  independent  origin  (188,  209-210). 

131.  The  Three  Forms  of  Capital. — The  reason  above  ad- 
duced for  excluding  land  from  the  category  of  capital  can 
hardly  justify  a  departure  from  the  current  popular  usage. 
We  shall  therefore  adopt  the  customaiy  way  of  considering 
land  as  being,  like  all  other  wealth  that  returns  a  revenue,  a 
form  of  capital;  but  at  the  same  time  we  must  not  lose  sight 
of  what  this  entails,  namely  that ' '  capital, ' '  under  this  defini- 
tion, includes  three  classes  of  wealth,  each  of  which  must  be 
considered  separately  when  their  faculty  to  yield  revenue  is 
to  be  analyzed.  They  are  land,  capital  goods  and  money,  the 
revenue  derived  from  them  being  distinguished  as  rent,  capital 
returns  and  money  interest.  Revenue-yielding  rights,  like 
franchises  and  certain  monopolies,  are  generally  classed  as 
part  of  the  capital  of  a  business  organization,  but  as  we  shall 
later  make  a  special  study  of  this  kind  of  capital,  we  shall  for 
the  present  leave  it  out  of  consideration. 

These  three  forms  of  capital,  though  deriving  in  totally 
different  ways  their  power  to  afford  a  revenue,  are  neverthe- 
less closely  related,  as  is  indicated  by  the  fact  that  the  rate  of 
net  returns  from  land,  from  capital  goods  and  from  money  is 
practically  the  same.  It  is  for  this  reason  that  these  three 
forms  of  wealth  may  logically  be  classed  as  "capital." 

In  studying  the  way  in  which  each  of  these  fonns  obtains 
its  power  to  command  a  revenue,  we  must  accordingly  seek 
not  only  for  the  origin  of  that  power,  but  also  for  the  reason 
why  the  rate  of  net  returns  from  all  of  the  three  forms  is  the 
same  (181,  185,  258,  207). 

132.  Classification  of  Capital  Goods. — The  second  form 
of  capital,  namoly  capital  goods,  may  be  subdivided  into  two 
classes.  Those  are  things  in  course  of  production  and  things 
tvhich  are  means  of  production  (152,  186).     The  customary 


164  DISTRIBUTION  OF  WEALTH  [133 

division  into  ''floating"  and  "fixed"  capital  is  confusing, 
since  floating  capital  is  considered  to  include  not  only  goods 
in  course  of  production,  but  also  money,  and  money  cannot 
properly  be  classed  as  capital  goods. 

In  this  classification  goods  in  course  of  production  embrace 
such  things  as  iron  while  being  shaped  into  a  loom,  or  yarns 
while  being  woven  into  cloth.  Their  value  increases  during 
the  operation.  Among  means  of  production  are  classed  the 
things  which  are  being  used  in  the  process  without  becoming 
bodily  incorporated  in  the  product,  like  the  building  and 
equipment  of  a  factory,  the  coal,  gas,  oil,  and  so  forth,  used 
in  running  the  plant.  The  value  of  these  constantly  diminishes 
or  entirely  disappears.  But  the  value  so  disappearing  from 
the  means  of  production  is  not  lost,  for  it  is  imparted  to  the 
things  in  course  of  production,  so  that  the  collective  value  of 
means  and  products  actually  increases  as  the  work  proceeds 
(133).  It  has  already  been  pointed  out  (10)  how  the  po- 
tential utilities  with  which  means  of  production  have  been 
invested  by  past  labor  are  converted  into  actual  utilities  of 
the  goods  that  are  being  advanced  to  completion.  Figuratively 
speaking,  goods  in  course  of  production  absorb  not  only  the 
labor  applied  to  them,  but  also  a  portion  of  the  labor  previously 
spent  in  the  making  of  the  means  of  production.  The  cloth 
is  the  result,  not  only  of  the  labor  that  produced  the  yarns 
and  the  labor  necessary  to  change  these  into  cloth,  but  also  of 
a  share  of  the  labor  spent  in  erecting  the  factory  building,  in 
constructing  the  machines,  and  in  producing  all  other  sup- 
plies required  for  carrying  on  the  business.  For  the  same 
reason  that  yams  are  considered  to  be  garments  in  course  of 
production,  a  loom  on  which  the  cloth  for,  say  50,000  suits  of 
clothes  can  be  woven  should  be  viewed  as  50,000  suits  of 
clothes  in  a  partly  finished  state. 

Capital  goods,  in  whatever  form  they  may  be,  are,  accord- 
ingly, immature  goods,  namely  goods  tvhich  are  the  embodi- 
ment of  past  labor,  to  be  utilized,  through  future  labor,  for 
producing  consumable  commodities  (191). 

133.  Active  and  Idle  Capital. — It  goes  without  saying  that 
land  can  return  rent  only  while  in  use,  and  that  capital  goods 


133]  THE  PROCESS  OF  APPORTIONMENT  165 

will  yield  a  revenue  only  while  being  forwarded  toward  ma- 
turity. If  they  are  allowed  to  remain  unused,  the  "services" 
for  which  rent  and  capital  returns  are  held  to  be  due  are  not 
rendered,  and  these  incomes  do  not  accrue. 

As  a  rule,  capital  goods  are  in  use  only  while  labor  is  being 
applied  to  them  in  the  process  of  production.  This,  however, 
is  true  only  in  a  general  way.  In  the  production  of  many 
things  there  are  periods  when  active  operations  must  cease  in 
order  that  the  process  may  take  its  proper  course.  Wine  is 
stored  for  years  for  the  purpose  of  ageing.  Agricultural 
produce  in  course  of  cultivation  can  be  worked  upon  only  at 
varying  intervals,  and  after  harvesting  some  of  it  must  be 
kept  in  store  so  as  to  be  available  in  the  interval  between 
seasons.  Manufactured  goods  remain  in  store  for  a  certain 
average  time  before  they  reach  the  consumer.  During  these 
periods  all  these  various  things  are  actually  undergoing  ad- 
vancement toward  ultimate  use. 

During  the  entire  period  required  for  production  the  things 
that  are  being  forwarded  toward  consumption  gradually  in- 
crease in  value.  According  to  experience  this  growth  of 
value  is  ordinarily  such  that,  after  the  labor  applied  is  re- 
quited, a  difference  still  remains  which  in  general  is  pro- 
portionate to  the  amount  of  capital  and  to  the  time  during 
which  this  capital  is  employed  (203).  This  remainder  is  the 
compensation  that  goes  to  capital.  Only  when  interruptions 
occur  in  the  maturing  process,  or  when  the  time  of  this  process 
is  uselessly  prolonged,  does  capital  cease  to  get  a  return. 
Capital  is  thus  recognized  in  two  states  of  existence ;  in  the 
one  case  as  live,  employed  or  active  capital,  in  the  other  as 
dead,  unemployed  or  idle  capital. 

In  the  usual  course  of  affairs  the  purpose  of  acquiring 
capital  goods  is  to  "employ"  them  by  advancing  their  unripe 
ntilitios  toward  maturity.  The  cloth  manufacturer  buys  looms, 
yams  and  other  supplies  to  the  end  of  producing  cloth.  The 
merchant  buys  this  cloth  in  order  to  retail  it  to  his  customers, 
and  whon  he  soils  it,  it  is  economically  advanced  by  his  effort 
and  is  greater  in  value  than  whon  he  bought  it.  At  each  suc- 
cessive transfer  capital  goods  appear  in  a  more  advanced  stage 


166  DISTRIBUTION  OF  WEALTH  [134 

and  possess  a  higher  value  (132),  until,  at  the  last  exchange, 
they  pass  into  the  hands  of  the  consumer  as  final  products  at 
their  ultimate  value. 

134.  Money  is  Always  Idle  Capital. — In  this  very  respect 
money  differs  absolutely  from  capital  goods  (130).  Money 
does  not  undergo  any  transformation  between  exchanges  (203). 
It  remains  unaltered,  both  in  its  economic  condition  and  in  its 
value  expressed  in  terms  of  the  value  unit,  and  for  this,  if  for 
no  other  reason,  must  not  be  confused  with  capital  goods.  It 
would  in  fact  be  worthless  as  a  medium  of  exchange  if  it  were 
otherwise.  The  gold  which  forms  the  reserves  of  banks  and 
of  the  world 's  treasuries  is  locked  up  in  vaults,  thus  being  held 
from  industrial  fields  where  it  could  be  utilized  like  other  com- 
modities. Unlike  the  value  of  capital  goods,  that  of  money 
cannot  be  increased  by  either  being  worked  upon  or  put  in 
store ;  it  cannot  bring  a  revenue  to  its  actual  possessor.  Con- 
sidered in  this  light,  all  money  is  manifestly  idle  capital,  and 
as  such  must  be  distinguished  from  capital  goods,  if  the  in- 
vestigation of  the  cause  that  gives  to  money  the  power  to 
command  interest  is  to  be  intelligently  pursued. 

This  distinction  has  been  clearly  recognized  by  many 
writers  who,  however,  have  failed  to  realize  that  for  this  reason 
money  is  a  kind  of  capital  w^hich  is  radically  different  in  its 
economic  aspects  from  capital  goods  (188,  267). 

According  to  Adam  Smith : 

Money,  the  great  wheel  of  circulation,  the  great  instrument  of 
commerce,  like  all  other  instruments  of  trade,  though  it  makes  a  part, 
and  a  very  valuable  part,  of  the  capital,  makes  no  part  of  the  revenue 
of  the  society  to  which  it  belongs.^^ 

John  Stuart  Mill  says: 

JMoney  cannot  in  itself  perform  any  part  of  the  office  of  capital, 
since  it  can  afford  no  assistance  to  production.'* 

According  to  A.  F.  Walker: 

It  is  true  that  money  does  not  beget  money,  but  capital  does 
manifestly  beget  capital." 

«  Smith,  p.  220.  "  Mill,  I,  p.  83.  "  Walker,  p.  9G. 


135]  THE  PROCESS  OF  APPORTIONMENT  167 

Simon  Newcomb  asserts: 

The  money  serves  the  banker  no  useful  purpose  until  lie  passes  it 
to  someone  else,  perhaps  a  customer.  Everyone  into  whose  hands  it 
falls  must  be  paying  or  losing  interest  on  it  while  he  keeps  it,  and  he 
cannot  gain  the  interest  until  he  purchases  an  ownership  in  some  form 
of  actual  capital."* 

It  is  evident  that  these  authorities  clearly  perceived  the  dis- 
tinction between  money  and  actual  capital  or  capital  goods. 
Nevertheless,  when  they  come  to  examine  the  nature  of  in- 
terest on  money  loans,  they  quite  overlook  the  significance  of 
the  distinction  which  they  so  clearly  point  out  (210). 

135.  The  Conception  of  Capital  as  a  "  Fund." — The  fact 
that  capital  returns  a  revenue  has  led  to  the  conclusion  that 
capital  has  not  only  the  faculty  of  maintaining  itself, but  has  ac- 
tually a  power  of  increase.  This  proposition  is,  however,  clearly 
inapplicable  to  the  individual  things  of  which  the  capital  of 
a  productive  group  consists.  Thus,  for  instance,  the  buildings 
and  equipments  of  a  factory  do  not  increase  in  value ;  on  the 
contrary,  they  constantly  deteriorate  and  accordingly  become 
less  valuable.  When  the  power  of  capital  to  increase  is  in 
question,  the  term  "capital"  can  have  reference  only  to  the 
things  that  collectively  make  up  the  capital  of  a  productive 
group.  This  has  given  rise  to  lengthy  dissertations  on  the 
discrimination  that  should  be  made  between  capital  considered 
in  a  "concrete"  and  capital  considered  in  an  "abstract"  sense, 
or,  more  correctly,  between  capital  goods  as  such  and  capital 
considered  as  a  "fund."  In  colloquial  language  the  term 
capital  is  indeed  used  in  both  senses,  and  it  may  be  of  ad- 
vantage to  point  out  the  difference  so  as  to  prepare  the  reader 
to  avoid  misunderstandings  by  confusing  the  two  concepts. 

Even  when  considered  as  a  fund,  it  is  clear  that  capital 
must  at  any  moment  consist  of  certain  definite  and  tangible 
things.  The  designation  "abstract"  is  therefore  inappro- 
priate. There  is  no  difference,  at  any  given  moment,  between 
capital  viewed  as  a  fund  and  the  things  constituting  that 
capital,  except  as  a  matter  of  dialectics.    A  certain  fund  may 

*»Kewcomb,  p.  390. 


168  DISTRIBUTION  OF  WEALTH  [135 

at  a  given  time  be  invested  in  a  cloth  factory  and  thus  mo- 
mentarily consist  of  the  factory  building,  the  looms,  the  yarns. 
But  at  another  time  it  may  be  invested  otherwise  and  yet  be 
the  same  fund.  A  difference  betAveen  the  two  ideas  appears 
only  when  the  identity  of  a  given  capital,  in  the  course  of  its 
existence,  is  followed  up  either  in  a  physical  or  in  an  economic 
sense. 

Suppose  a  man  owning  a  ranch  stocked  with  cattle  wishes 
to  dispose  of  it  and  to  invest,  instead,  in  the  fruit  trade,  a 
steamer  engaged  in  that  enterprise  having  been  offered  him. 
He  finds  a  purchaser  for  his  ranch  and,  with  the  money  so 
obtained,  he  buys  the  steamer  and  engages  in  the  fruit  trade. 
We  are  here  dealing  with  three  quantities  of  capital  of  equal 
value:  (1)  a  cattle  ranch,  (2)  a  sum  of  money,  and  (3)  a 
fruit-laden  ship.  Viewed  in  a  physical  sense,  each  of  these 
three  aggregates  of  wealth  has  its  independent  existence.  The 
ranch,  the  sum  of  money  and  the  vessel  remain  a  ranch,  a  sum 
of  money  and  a  vessel,  irrespective  of  who  owns  them. 

But  now  suppose  the  ranchman  views  his  possessions  as  a 
fund.  On  the  first  day  his  capital  consisted  of  a  stocked  ranch. 
On  the  second  day  he  possesses  in  its  place  a  certain  sum  of 
money.  The  third  day  finds  him  the  owner  of  a  ship.  His 
fund  of  capital  was  twice  converted.  In  the  end  the  fruit 
vessel  is  to  him  the  same  fund  that  originally  existed  in  the 
form  of  the  ranch,  only  differently  embodied. 

Or  let  us  consider  a  cloth  manufacturer  whose  factory  is 
stocked  with  the  necessary  machines,  yarns  and  other  supplies, 
and  who  has  an  adequate  bank  account,  all  of  which  together 
constitute  his  capital.  A  week  later  we  find  the  yarns  turned 
into  cloth  and  the  bank  account  exhausted  by  the  pajonent  of 
wages.  In  the  place  of  yams  and  bank  balance  the  manu- 
facturer possesses  cloth.  Upon  selling  this,  he  applies  the 
proceeds  to  buy  more  yams  and  to  replenish  his  bank  account, 
probably  finding  that  he  has  made  some  profit. 

Viewing  the  various  things  in  their  physical  aspect,  we 
observe  the  yarns  converted  into  cloth  and  the  money  passed 
out  into  circulation  by  the  pajTnent  of  wages.  Then  we  see 
the  cloth  sold  for  other  money,  some  of  which  is  passed  out  in 


135]  THE  PROCESS  OF  APPORTIONMENT  169 

buying  a  new  stock  of  yarns.  The  manufacturer  parts  with 
some  capital  goods  and  acquires  others;  he  pays  out  some 
money  and  receives  other  money. 

"When  capital  is  viewed  as  a  fund,  its  physical  composition 
may  undergo  a  radical  change  from  time  to  time,  either  by 
way  of  exchange,  as  in  the  case  of  the  rancher,  or  partly 
through  productive  processes  and  partly  through  exchange,  as 
in  the  case  of  the  cloth  manufacturer.  The  physical  identity 
is  lost,  but  the  fund  is  economically  identified  from  day  to 
day  by  the  fact  that  in  the  course  of  production  and  exchange 
the  things  constituting  it  have  taken  the  place  of  the  things 
of  which  it  consisted  before.  In  the  rancher's  fund  the  ship 
took  the  place  of  the  ranch,  yet  it  is  the  same  fund  it  was 
before;  it  is  still  his  "capital."  To  the  cloth  manufacturer 
the  cloth  at  the  end  of  the  week  is  the  embodiment  of  the  same 
fund  which  at  the  beginning  consisted  of  yarns  and  a  certain 
bank  account.  And  after  selling  the  cloth  and  buying  a  fresh 
stock  of  yarns,  he  may  find  his  bank  account  to  exceed  that 
which  he  had  at  first ;  his  fund  of  capital  grew  as  a  flock  of 
sheep  might  have  been  increased  through  the  birth  of  a 
number  of  lambs. 

We  know  from  experience  that  capital  invested  in  pro- 
duction and  commerce  ordinarily  does  increase  in  this  manner, 
or,  as  would  appear,  "earns"  a  revenue.  In  various  writings 
J.  B.  Clark  points  to  the  fact  that  means  of  production,  when 
in  use,  lose  in  value,  while  at  the  same  time  their  owner 
reaps  a  profit  from  them,  and  that  accordingly  this  profit  is 
yielded,  not  by  capital  goods,  but  by  capital  viewed  in  the 
abstract  sense.  He  therefore  concludes  that  the  problem  of 
intercut  can  find  its  solution  only  by  tracing  the  relation  of 
capital,  considered  as  a  fund,  to  the  process  of  production,  and 
that  interest  consist  of  the  earnings  of  the  instrument 
procured  by  the  employer  with  the  final  increment  of  bor- 
rowed capital.  But  a  brief  survey  of  the  sul)ject  makes  it 
clear  that  the  interest  problem  is  not  difl'erent  whether  capital 
is  considered  in  the  concrete  or  in  the  abstract  sense.  In  either 
case  the  tangible  wealth  involved  must  be  considered  in  the 
aggregate.     In  the  process  of  produetion  the  goods  that  are 


170  DISTRIBUTION  OF  WEALTH  [136, 137 

being  advanced  toward  maturity  increase  in  value  while  the 
means  of  production  depreciate,  and  the  increase  in  value  of 
the  former  exceeds  the  loss  in  value  of  the  latter  so  much  that 
the  combined  value  shows  an  increase.  The  problem  of  capital 
interest  thus  resolves  itself  into  the  question:  Why  is  it  that 
the  market  value  of  products  of  labor  exceeds  the  market  value 
of  materials,  incidentals,  depreciation  of  means  of  production 
and  wages;  why  is  it  that  the  value  of  cloth  exceeds  the  rec- 
ompense of  effort  plus  the  outlay  for  yarns  and  for  the 
maintenance  of  the  plant? 

136.  Classification  of  Incomes. — In  the  modern  system  of 
production  and  distribution  not  only  those  who  are  actively 
engaged,  but  also  the  passive  participants,  those  who  furnish 
the  land  and  other  capital,  share  in  the  division  of  the  proceeds. 
Incomes  are  therefore  usually  classified  as  wages,  rent  and  in- 
terest; and  to  these  some  students  of  the  subject  would  add 
business  profits. 

This  classification  of  incomes  has  been  handed  down  to  us 
from  the  earlier  economists,  but  is  not  as  comprehensive  as 
it  should  be.  For  the  purpose  of  a  more  thorough  examina- 
tion economic  returns  should  primarily  be  divided  into  two 
principal  forms  of  income,  corresponding  to  active  and  passive 
participation  of  the  recipients,  the  one  comprising  ivages,  the 
other  profits. 

It  is  to  be  observed  that  these  terms  are  here  applied  in  a 
sense  somewhat  different  from  their  colloquial  meaning.  The 
term  "wages"  is  to  include  all  compensation  for  personal  par- 
ticipation in  productive  effort,  and  "profits"  is  used  in  the 
sense  of  acquisition  without  such  effort. 

137.  Wages  and  Profits. — The  tenn  "wages,"  as.  above 
defined,  embraces  every  recompense  for  labor,  whether  physical 
or  mental,  direct  or  indirect.  It  includes  all  that  a  person 
obtains  by  useful  work,  whether  he  works  alone  or  in  company 
with  others,  whether  he  is  employer  or  employed,  artisan  or 
merchant,  lawyer  or  teacher.  It  is  not  restricted  to  what  we 
customarily  term  wages,  that  is,  the  stipend  allotted  to  manual 
labor;  it  embraces  also  salaries,  commissions,  fees,  and  espe- 


138]  THE  PROCESS  OF  APPORTIONMENT  171 

cially  that  which  is  so  often  erroneously  called  profit,  namely 
the  recompense  for  personal  services  rendered  by  the  self- 
employing  artisan,  the  manufacturer,  the  merchant,  the  trader, 
the  inventor.  "Profits,"  on  the  other  hand,  are  the  acquisi- 
tions obtained  in  all  other  ways. 

The  merchant  sometimes  calls  the  excess  of  the  retail  over 
the  wholesale  price  of  his  goods  his  profit.  But  from  that 
excess  he  must  defray  the  expenses  incident  to  his  business 
and,  in  addition,  must  obtain  something  for  his  own  work, 
namely  his  own  wages ;  hence  we  must  avoid  considering 
* '  profit ' '  in  this  broad  sense.  Some  w^riters,  on  the  other  hand, 
use  the  term  to  designate  only  the  remainder  of  income  after 
the  deduction  of  all  outlays  and  charges,  including  those  for 
the  use  of  capital  and  land.  In  the  following  pages  ''profits" 
are  to  be  understood  as  excluding  all  forms  of  compensation 
for  personal  participation  and  as  including  all  other  forms  of 
income,  particularly  rent  of  land,  capital  returns  and  interest 
for  money. 

Considered  in  this  light,  wages  are  the  recompense  for 
active  assistance  in  production,  for  "personal"  services,  while 
profits  are  the  returns  for  passive  participation,  or  for  what 
may  be  termed  ' '  impersonal ' '  services.  The  service  for  which 
wages  accrue  can  be  rendered  only  by  personal  participation, 
while  that  for  which  profits  accrue  does  not  require  personal 
collaboration.  The  absence  of  the  personal  element  is  ex- 
emplified notably  where  profits  accrue  to  impersonal  recipients, 
such  as  endowed  institutions  and  trust  estates. 

138.  Classification  of  Profits. — There  are  two  distinct 
kinds  of  profits;  the  first  kind  are  capital  profits  which  are 
practically  continuous  or  regularly  recurring,  while  the  second 
are  chance  profits,  which  are  irregular  and  uncertain.  Capital 
profits  are  derived  from  the  ownership  of  land,  of  capital 
goods,  of  money  and  of  franchises,  and  are,  respectively,  rent 
of  land,  returns  of  capital  goods,  interest  on  money  and  in- 
comes from  franchises.  Chance  profils  arise  from  fluctuation 
of  prices,  from  incidental  or  a(;cidcntal  d('i)artures  from  the 
average  condition  of  affairs  and  from  gambling  in  any  of  ils 
forms;   anrl   they  arc  likely  to  alternate   with  losses  of  like 


172  DISTRIBUTION  OF  WEALTH  [139 

nature  (224),  in  other  words,  they  may  be  negative  as  well' as 
positive. 

In  the  usual  way  of  accounting  for  money  interest  a  re- 
lation between  it  and  capital  returns  is  assumed  which  does 
not  exist  (130).  It  is  generally  held  that  the  income  which  we 
here  designate  as  capital  returns  or  capital  interest  is  identical 
with  money  interest,  on  the  ground  that  the  lender  of  the 
money  is  virtually  the  lender  of  the  capital  goods  obtained  for 
it.  We  shall  find  later  (209-210)  that  this  view  is  untenable, 
and  that  it  is  necessary  to  distinguish  capital  interest  from 
money  interest  and  to  deal  with  them  separately  in  our  analysis 
(188). 

The  various  forms  of  income  can  accordingly  be  tabulated 
as  follows  (168): 

_^  [Rent  of  Land. 

Incomes....  |  ^j;; ^Capital  Profits .    Cai^ita^^ret- 

1  Chance  Profits.  ^^^^^"^^^  ^^"^  Franchisee. 

139.  Gross  Profits  of  Capital.— In  common  parlance  the 
term  "rent"  means  the  stipulated  charge  for  the  lease  of 
houses  or  of  land,  and  "interest"  means  the  stated  charge  for 
the  loan  of  money.  But  if  these  stipulated  charges  are  an- 
alyzed, they  are  found  to  be  made  up  of  several  items,  each 
of  which  is  compensation  for  a  different  economic  service.  To 
avoid  confusion,  the  common  meanings  of  the  above  terms  have 
been  abandoned  and  the  terms  defined  so  that  each  shall  be 
related  to  a  separate  cause.  In  discussions  of  economic  topics 
the  terms  rent  and  interest  are  accordingly  used  in  a  more 
restricted  sense.  But  as  in  our  discussions  we  shall  frequently 
have  occasion  to  refer  to  economic  rent  and  pure  interest,  and 
also  to  stipulated  or  gross  rent  and  interest,  we  shall  mark 
the  distinction  by  these  designations. 

The  rent  agreed  upon  for  the  lease  of  a  farm,  for  instance, 
depends  not  only  on  the  location  of  the  farm  and  the  fertility 
of  its  soil,  but  also  on  the  cost  of  repairs  which  the  landlord  is 
to  make,  on  taxes  levied  on  improvements,  on  the  rate  of  in- 
terest as  it  applies  to  the  value  of  the  farm  house  or  other 
improvements,  and  on  other  incidentals.    But  considered  as  a 


139]  THE  PROCESS  OF  APPORTIONMENT  173 

simple  economic  return,  "rent"  must  be  understood  as  mean- 
ing only  those  profits  of  the  utilization  of  land  which  are 
derived  from  its  inherent  qualities,  namely  its  location,  its 
fertility  and  its  other  natural  endowments  (171). 

We  shall  find  that  the  profit  derived  from  the  use  of  these 
qualities,  that  is,  the  economic  rent,  while  primarily  obtained 
by  the  user  of  the  land,  ultimately  goes  to  the  owner.  If  the 
landowner  himself  is  the  user,  he  directly  obtains  the  benefit  of 
the  rent,  but  if  a  renter  uses  the  land,  the  economic  rent  figures 
as  a  part  of  the  stipulated  rent  paid  to  the  lando^\^ler,  In  gen- 
eral, any  excess  of  the  stipulated  over  the  economic  rent  is  due 
to  conditions  other  than  the  natural  endowments  of  the  land, 
chiefly  to  improvements  of  whatsoever  kind. 

We  must  here  not  forget  that  all  our  conclusions  relate  to 
an  average  of  general  conditions.  In  individual  cases  the  rent 
stipulated  and  agreed  upon  between  owner  and  tenant  may 
differ  more  or  less,  one  way  or  the  other,  from  that  average. 
These  variations  must  be  regarded  as  being  in  the  nature  of 
chance  profits  or  chance  losses  which  are  incident  to  all  proc- 
esses of  production  and  exchange  and  therefore  enter  as  items 
of  the  gross  rent.  Such  variations  of  the  gross  rent  as  chance 
to  be  in  favor  of  the  landlord  are  tantamoimt  to  chance  losses 
by  the  tenant,  and  vice  versa,  of  course. 

Inasmuch  as  these  chance  departures  from  average  con- 
ditions balance  each  other  in  the  grand  total,  they  must  be 
ignored  in  the  discussion  of  general  economic  laws. 

The  income  from  the  loan  of  capital  goods  is  likewise  of  a 
composite  nature.  If  a  pleasure  yacht  is  leased  for  a  longer  or 
shorter  cruise,  or  a  horse  and  carriage  hired  out  for  a  time, 
the  stipulated  payment  covers  three  separate  items.  These 
are  wages,  compensation  for  depreciation  and  pure  interest, 
which  may  be  detailed  as  follows : 

When  something  is  leased,  the  lessor  is  usually  obliged  to 
perform  some  personal  services.  One  portion  of  the  hire  con- 
stitutes the  wages  for  such  services.  It  covers  the  cost  of 
cleaning,  storing  and  repairing,  of  feeding,  maintaining  and 
housing,  etc. 

A  second  portion  is  to  be  accounted  for  as  follows.     The 


174  DISTRIBUTION  OF  WEALTH  [139 

thing  leased  will  deteriorate  while  in  use.  We  know  that  it 
cannot  be  utilized  forever,  but  that  after  a  time  it  will  wear 
out  beyond  repair.  Its  total  capacity  to  yield  services  or  to 
gratify  desires  is  limited,  and  a  portion  of  this  capacity  is 
consumed  by  the  lessee.  A  lease  virtually  constitutes  a  partial 
sale  of  the  total  utilities  of  the  object.  Each  lessee  must  there- 
fore pay  his  share,  so  that  by  the  time  the  object  is  worn  out, 
taking  in  account  its  average  duration,  its  value  will  have 
been  restored  to  the  owner.  The  second  item,  then,  is  com- 
pensation  for  wear  and  tear,  also  known  as  amortization.  This 
portion  includes  the  item  of  risk  of  accidental  loss,  which  is 
accounted  in  the  average  durability  (219).  In  any  specific 
ease  the  actual  duration  of  a  thing  may  be  greater  or  less,  but 
profits  or  losses  due  to  departures  from  averages  are  to  be 
classed  as  chance  profits  (215)  and  as  such  may  be  plus  or 
minus. 

The  third  portion  of  the  stipulated  hire  is  that  further 
income,  usually  designated  as  interest,  which  constitutes  the 
net  return  yielded  by  capital  goods.  This  is  the  only  item 
which  constitutes  a  net  income  for  impersonal  services  and 
figures  as  pure  capital  interest. 

Periodic  incomes,  such  as  dividends  on  capital  stock,  which 
accrue  to  the  owners  of  capital  goods  in  use  by  productive 
groups  apart  from  any  personal  participation  of  those  owners 
in  the  active  work  of  the  groups,  are  in  the  main  made  up  of 
two  parts  (265a),  as  follows: 

First,  inasmuch  as  capital  which  is  in  the  form  of  means 
of  production  will  deteriorate  through  use  and  so  lose  in  value, 
a  portion  of  the  income  returned  to  the  furnisher  of  capital 
must  cover  this  depreciation  and  also  insurance  against  risk 
of  its  destruction,  partial  or  complete,  by  accident  or  other- 
wise. Of  course,  if  this  portion,  instead  of  being  included  in 
the  periodic  payments  to  the  owner  of  the  capital,  is  applied 
to  maintain  the  value  of  the  capital  by  repair,  replacement 
and  extraneous  insurance,  then  the  item  covering  depreciation 
will  disappear  from  the  periodic  returns. 

It  should  not  be  overlooked  that  the  item  of  amortization  is 
really  a  due  pajment  by  one  group  for  the  using  up  of 


139]  THE  PROCESS  OF  APPORTIONMENT  175 

capital  goods  that  have  been  produced  by,  and  obtained  from, 
other  groups.  Amortization  is  therefore  merely  a  payment  for 
material  in  the  process  of  sharing  the  value  of  the  final 
products  among  the  contributing  groups.  It  cannot  be  con- 
sidered as  value  produced  by  the  group  which  shares  it  out, 
and  is  therefore  not  to  be  counted  as  part  of  the  value  pro- 
duced by  and  distributed  within  the  group  among  its  members 
(143,  265&). 

Second,  the  remainder,  in  point  of  fact,  a  considerable 
portion  of  the  periodic  capital  returns,  is  what  is  known  as 
interest  yielded  by  capital  goods.  It  is  only  this  item  which 
can  be  considered  as  really  "capital  interest." 

The  periodic  returns  accruing  to  money  loans,  namely  gross 
interest,  is  also  of  a  composite  nature,  being  composed  of  three 
distinct  items  (76,  248,  263a).  The  first  of  these  is  recom- 
pense for  labor  and  other  costs  involved  in  making  and  super- 
vising loans.  In  the  case  of  long-time  loans,  such  as  those  on 
bonds  and  mortgages,  this  item  is  comparatively  small.  But 
in  loans  made  by  deposit  banks  it  is  considerably  greater,  as  it 
must  cover  the  expenses  of  carrying  on  the  banking  business, 
including  the  work  of  paying  or  clearing  the  checks  through 
which  commercial  payments  are  effected  (263&). 

The  second  item  is  insurance  against  risk.  In  the  case  of 
money  loans,  as  distinguished  from  loans  of  capital  goods,  the 
element  of  deterioration  is  not  present,  since  the  loan  must  be 
returned  by  the  borrower  in  the  form  of  money  and  not  in  the 
form  of  a  partially  worn-out  thing.  But  the  element  of  risk 
of  loss  through  shortcoming  of  the  debtor  is  generally  present 
in  a  greater  or  less  degree  (220),  and  the  stipulated  interest 
includes  the  item  of  insurance  against  such  loss.  It  is  this 
addition  which  induces  the  lender  to  assume  the  risk. 

The  third  of  the  items  which  make  up  the  compensation 
for  the  service  of  lending  money  is  that  which  has  been  dis- 
tinguished as  pure  interest  or  interest-proper.  This  item  is  the 
net  income  of  the  lender,  a  recompense  for  strictly  impersonal 
services.  The  origin  of  the  power  of  money  to  command  thi.s 
recompense  will  be  fully  discussed  later  (241-243). 


176  DISTRIBUTION  OF  WEALTH  [uo 

140.  Gross  Business  Profits. — The  classification  of  the  sev- 
eral specific  forms  of  income  presented  above  in  tabulated 
form  has  been  made  with  respect  to  the  services  for  which 
they  are  returns.  The  several  forms  of  income  may,  however, 
occur  in  various  combinations.  A  man's  actual  income  may 
be  composed  of  any  or  all  of  these  specific  elemental  forms. 
Although  in  the  case  of  composite  incomes  it  is  impossible  to 
tell,  in  dollars  and  cents,  just  what  portion  is  due  to  either 
of  the  separate  kinds  of  services,  nevertheless  a  dialectic  separa- 
tion is  not  only  possible,  but  even  necessary,  in  order  rationally 
to  analyze  the  distribution  of  incomes.  A  merchant,  for  in- 
stance, may  be  the  owner  of  the  lot  on  which  his  store  is  located, 
of  the  buildings  and  of  all  the  other  capital  invested  in  his 
business.  His  annual  net  income  will  then  consist  of  rent 
accruing  through  the  more  or  less  favorable  location  of  his 
store;  of  interest  returned  by  his  other  capital  including 
money;  of  wages  for  supervising  his  business  (168)  ;  and  also 
of  chance  profits,  which,  however,  are  likely  to  alternate  with 
similar  losses.  Where  the  element  of  monopoly  comes  into 
play,  monopoly  profits  will  also  arise,  but  at  the  present  stage 
of  our  study  this  element  is  assumed  to  be  absent,  as  it  will 
receive  special  attention  later.  Mention  is  sometimes  made 
of  another  form  of  elemental  income,  namely  "business 
profits,"  but  as  there  is  no  form  of  economic  service  besides 
those  already  noted,  and  as  there  cannot  be  an  effect  without 
a  cause,  the  existence  of  business  profits,  except  as  a  com- 
position of  two  or  more  of  the  elementary  forms  of  income 
above  enumerated,  cannot  be  assumed. 

That  which  in  business  parlance  is  usually  called  "profits" 
is,  accordingly,  composed  of  a  number  of  items,  of  which  only 
economic  rent  and  pure  interest  can  be  specified  as  capital 
profits.  A  failure  to  recognize  this  has  given  rise  to  the  notion 
that,  as  a  rule,  the  rate  of  capital  returns  exceeds  the  rate  of 
money  interest,  in  other  words,  that  money,  when  invested  in 
business,  generally  earns  more  than  when  invested  in  loans, 
and  that  for  this  reason  the  borrowing  of  money  with  which  to 
obtain  capital  goods,  in  other  words,  to  put  it  in  business,  is 
profitable  to  the  borrower.     But  this  is  true  only  where  the 


141]         THE  PROCESS  OF  APPORTIONMENT  177 

chance  profits  of  business  exceed  the  chance  losses,  which, 
according  to  the  law  of  probabilities,  happens  no  oftener  than 
the  reverse.  This,  of  course,  means  that  in  the  average  chance 
profits  and  losses  balance  each  other,  and  where  there  is  an 
excess  of  such  profits  over  losses,  the  excess  must  not  be  re- 
garded as  earnings  of  capital,  but  merely  as  incidents  of 
chance.  Profits  of  this  kind  are  apt  to  accrue  most  frequently 
during  periods  of  general  prosperity  and  are  equally  apt  to 
be  wiped  out  by  an  excess  of  chance  losses  during  periods  of 
depression.  Furthermore,  the  belief  that  an  excess  of  capital 
profits  over  current  money  interest  is  the  rule  seems  often 
confirmed  by  appearances.  If  a  business  man  is  unable  to 
fully  employ  his  ability  by  reason  of  an  insufficient  command 
of  capital,  an  increase  of  such  may  render  his  work  more 
productive.  Additional  income  from  this  cause  is,  however, 
not  capital  profit,  but,  on  the  contrary,  labor's  earnings  or 
wages.  When  all  factors  having  bearing  on  the  case  are 
properly  taken  into  account,  it  will  be  found  that  the  average 
rate  of  returns  from  capital  goods  does  not  exceed  the  current 
rate  of  interest  on  money  loans. 

141.  Composition  of  Productive  Groups. — The  various  in- 
comes of  individual  members  of  a  group  are  the  recompense 
for  their  respective  services.  We  have  therefore  next  to 
classify  the  members  of  the  group  with  respect  to  the  service 
or  function  performed  by  each,  and  unless  we  go  into  tech- 
nical details,  which  for  our  study  is  not  necessary,  the  number 
of  functions  is  very  limited. 

Inasmuch  as  a  number  of  individuals  are  often  engaged 
conjointly  in  performing  one  and  the  same  function,  while, 
on  the  other  hand,  one  or  more  of  the  members  of  a  group 
frequently  figure  in  several  capacities,  it  becomes  necessary  to 
disregard  the  persons  and  to  treat  only  the  functions  as  though 
each  were  performed  by  a  distinct  agent.  In  other  words,  we 
mast  personify  the  functions.  In  this  way  we  avoid  the  con- 
fusion which  would  ensue  if  we  were  to  deal  with  individuals 
in  their  mixed  capacities. 

Following  the  same  line  of  reasoning  that  led  us  to  the 
12 


178  DISTRIBUTION  OF  WEALTH  [in,  us 

classification  of  incomes,  we  must  separate  the  agents  into  two 
divisions,  namely  active  and  passive.  The  active  agents  are 
those  who  contribute  personal  services,  while  the  passive  agents 
are  those  who  supply  what  we  have  termed  impersonal  services. 

142.  Active  Agents. — The  active  agents  in  a  productive 
group  include  the  director  or  manager,  the  foremen  and  work- 
men, the  clerks  and  salesmen.  The  manager  organizes  the 
enterprise,  selects  the  methods  of  production,  controls  the 
purchase  of  the  means  of  production  and  of  the  supplies, 
directs  the  workers  and  attends  to  the  final  disposition  of  the 
goods  produced.  The  function  of  management  frequently  de- 
volves upon  a  number  of  individuals,  some  of  whom  perform 
their  part  in  the  technical,  the  others  in  the  commercial 
branch  of  the  undertaking.  In  their  combined  capacity  these 
represent  the  ' '  manager. ' '  The  workmen  are  specialized  more 
or  less,  to  suit  the  nature  of  the  business.  In  this  way  the 
active  agents  are  divided  into  two  divisions,  manager  and 
workmen,  though  the  line  of  separation  is  not  always  sharply 
defined. 

The  recompense  of  the  active  agents  is  wages,  which  may 
take  the  form  of  salaries,  commissions,  royalties,  business  in- 
comes, or  whatsoever  may  be  the  form  in  which  personal 
services  are  compensated. 

143.  Passive  Agents. — As  such  must  be  considered  the 
"capitalist"  in  his  various  phases  and  functions.  These  com- 
prise the  ownership  of  the  land  and  the  ownership  of  the 
capital  goods  and  the  working  fund  in  use  by  the  group,  and 
also  the  ownership  of  any  money  that  may  be  borrowed  by 
the  group.  In  addition  to  these  we  shall  presently  find  that 
another  function  must  be  recognized  as  a  passive  agent,  namely 
the  "enterpriser"  or  "venturer"  (144). 

The  land  furnished  by  its  owner  may  be  a  manufactur- 
ing site,  a  farm,  a  forest,  an  oyster  bed,  a  mine,  a  waterfall, 
etc.  The  service  of  furnishing  the  land  is  compensated  by 
rent  (325). 

The  capital  goods  furnished  by  their  owner  consist  of  means 
of  production,  including  all  improvements  on  the  land  utilized, 
and  all  material  of  production  and  the  working  fund.     The 


143]  THE  PROCESS  OF  APPORTIONMENT  179 

income  from  these  capital  goods,  apart  from  the  item  of 
amortization  (139),  is  what  we  have  termed  capital  interest. 
When  money  is  borrowed  from  a  money  lender,  that  lender 
becomes,  for  the  time,  a  component  of  the  capitalist  (347), 
and  in  this  case  a  portion  of  the  capital  returns  goes  to  him  in 
the  form  of  money  interest.  In  co-partnerships  the  function 
of  capitalist  is  exercised  in  common  by  the  partners.  In  stock 
companies  not  only  the  stockholders,  but  also  the  bondholders, 
considered  together  as  a  single  economic  person,  constitute 
the  capitalist. 

We  must  here  take  care  not  to  confuse  the  "capitalist" 
in  the  colloquial  with  the  "capitalist"  in  the  economic  sense 
(265a).  Where,  as  frequently  happens,  the  same  individual 
is  both  capitalist  and  manager,  we  must  distinguish  between 
the  two  functions  which  he  thus  fulfils.  As  capitalist  he  is  an 
investor,  and  as  such  receives  capital  interest ;  if  he  owns  the 
ground,  he  is  landlord  and  as  such  receives  rent;  and  if  he 
furnishes  money  to  the  enterprise,  he  is  money  lender,  and  as 
such  receives  money  interest.  On  the  other  hand,  in  the  capacity 
of  organizer  or  of  manager  he  is  not  a  capitalist,  but  one  of 
the  active  agents  of  the  group,  and  his  recompense  in  this 
respect  is  in  the  nature  of  wages. 

But  the  furnisher  of  capital  fulfils  still  another  function. 
The  capital  goods  are  as  a  rule  the  products  of  contributing 
groups,  and  when  the  capitalist  furnishes  them  he  is  really  in 
the  position  of  a  salesman  representing  these  groups  (2656). 
We  have  seen  before  that  as  furnisher  of  capital  goods  he 
obtains,  generally  speaking,  two  items,  namely  amortization 
and  capital  interest,  the  first  of  which  falls  away  if  the  capital 
goods  of  the  group  are  maintained  at  full  value  by  repair  and 
replacement. 

Let  us  take  at  first  the  case  where  the  capital  of  a  pro- 
*  ductive  group  constantly  depreciates  and  where  a  correspond- 
ing amortization  is  due  to  the  furnisher  of  the  capital  in 
addition  to  interest.  The  amortization  accrues  in  the  form  of 
instalment  payments  along  with  other  incomes  from  that 
group,  so  that  by  the  time  the  capital  is  finally  used  up,  the 
entire  value  has  been  covered  by  the  amortization  items.  ThCvSe 


180  DISTRIBUTION  OF  WEALTH  [144 

items  are  therefore  payments  for  services  received  from  ex- 
traneous groups  and  pertain  to  the  apportionment  of  the  gross 
income  among  those  groups.  Their  recipient  is  in  fact  not  a 
member  of  the  group  to  which  he  has  furnished  capital.  He 
becomes  capitalist  of  that  group  only  through  his  having  to 
wait  for  those  payments  while  permitting  the  use  of  his 
capital  by  the  group  before  he  is  paid  for  it.  Thus  the  item 
of  interest  accrues  to  him  for  the  service  of  conceding  the 
use  of  the  capital  while  it  is  yet  his  property.  Only  in  this 
capacity  is  he  member  of  the  group  and  becomes  participant, 
in  the  sharing  of  the  net  income  within  the  group. 

The  second  case  is  that  in  which  the  amortization  items 
are  not  withdrawn,  but  are  applied  to  the  maintenance  of  the 
capital  by  repair,  replacement  and  full  insurance  against  lass 
by  accident.  This  case  differs  from  the  first  only  by  an  in- 
definite postponement  of  the  payment  of  the  principal.  The 
capitalist  retains  ownership  of  the  undiminished  capital  fur- 
nished, and  he  receives  only  capital  interest.  Of  course,  the 
question  of  chance  profits  or  losses  is  here  not  taken  into 
account, 

144.  The  Venturer. — We  have  already  pointed  out  (61) 
that  the  normal  market  value  of  the  products  of  labor  equals 
the  cost  of  their  production,  if  we  include  in  this  cost  not  only 
that  of  labor,  materials  and  incidentals  at  their  market  rates, 
but  also  all  charges  for  the  use  of  land  and  of  other  capital  at 
market  rates,  and  finally  also  the  recompense  of  the  employer 's 
or  manager's  services  at  their  market  value.  Thus,  on  an 
average,  the  gross  income  of  a  business  which  does  not  enjoy 
any  special  franchises  or  other  monopoly  advantages  just 
covers  all  items  of  cost. 

In  practice,  however,  the  actual  income  derived  by  any 
productive  group  from  the  sale  of  its  products  varies  more  or 
less  from  this  average.  It  is  sometimes  greater,  sometimes 
less  than  this  cost,  the  difference  being  chance  profits,  which 
may  be  plus  or  minus.  In  every  business  these  chances  must 
be  taken  by  some  one  who  is  in  position  to  do  so.  A  business 
man  may  acquire  chance  profits  in  addition  to  the  wages  of 
his  own  labor  and  the  normal  profits  of  the  capital  he  has 


145]  THE  PROCESS  OF  APPORTIONMENT  181 

invested;  or,  on  the  other  hand,  he  may  sustain  losses,  and  it 
may  even  happen  that  these  are  greater  than  his  wages  and 
capital  profits  combined. 

In  a  complete  analysis  of  the  composition  of  an  economic 
group  we  must  therefore  recognize,  as  a  member  of  the  group, 
one  who  assumes  the  business  chances.  This  particular  mem- 
ber we  shall  designate  the  "venturer"  (143,  219,  224).  It  is 
true  that  in  actual  life  this  venturer  has  rarely  a  separate 
existence,  his  function  being  nearly  always  combined  with 
that  of  either  manager  or  capitalist  or  with  both.*" 

If  we  were  to  single  out  the  venturer  as  an  individual 
divested  of  other  functions,  we  would  have  to  conceive  him  as 
one  who,  while  having  no  capital  of  his  own  invested  in  the 
enterprise  and  taking  no  part  in  its  management,  is  neverthe- 
less its  nominal  owner.  If  the  undertaking  happens  to  have 
more  than  the  usual  degree  of  success  and  its  income  exceeds 
the  costs  including  rent  and  interest,  the  excess  will  go  as 
chance  profit  to  the  venturer.  But  if  it  happens  to  be  un- 
successful and  the  balance  sheet  shows  losses  instead  of  profits, 
the  venturer  must  make  good  the  loss. 

145.  Composite  Agents. — We  have  now  classified  the  ele- 
mentary agents  composing  a  productive  group,  so  as  to  cor- 
respond with  the  several  elementary  forms  of  individual 
incomes.  As  already  stated,  some  persons  act  in  several  dif- 
ferent capacities,  while  some  functions  devolve  on  a  number 
of  individuals  who  are  therefore  to  be  considered,  in  an 
economic  sense,  as  conjointly  being  a  single  person. 

Many  business  men,  and  especially  professional  men,  com- 
bine the  position  of  manager,  workman,  landlord,  capitalist 
and  venturer  in  their  own  person.     More  frequently  it  hap- 

**  The  terms  "  entrepreneur  "  and  "  enterpriser  "  have  come  into 
use  to  designate  the  organizer  of  an  enterprise  who  also  assumes  the 
chances  of  success  and  failure  and  who,  according  to  our  way  of 
analyzing  the  composition  of  productive  groups,  represents  two  or  three 
functions.  lie  is  organizer,  vontvircr  and  usually  also  capitalist,  at 
least  in  part.  Wo  have  chosen  tlie  term  "  venturer "  in  preference  to 
"enterpriser"  because  tlie  function  we  desire  to  designate  is  of  an 
absohitely  passive  nature,  while  tiie  term  enterpriser  is  suggestive  of 
activity  and  would  tlierefore  he  apt  to  mislead  tlie  reader. 


182  DISTRIBUTION  OF  WEALTH  [146 

pens  that  a  business  man,  while  manager  and  venturer,  is 
capitalist  only  in  part,  he  having  borrowed  part  of  his  work- 
ing capital  or  rented  his  place  of  business.  If,  in  such  a 
case,  his  debts  equal  his  actual  assets,  he  is  not  even  capitalist 
in  any  degree.  As  manager  and  venturer  his  income  is  then 
confined  to  manager's  wages  and  chance  profits  or  losses,  and 
if  his  business  is  unprofitable,  his  income  as  manager  will  suffer 
accordingly,  for  the  loss  must  be  made  good  from  it. 

In  analyzing  stock  companies  we  find  the  function  of 
manager  to  be  held  conjointly  by  the  president  and  the  board 
of  directors,  together  with  the  superintendent,  the  foremen, 
etc.  The  "manager"  is  then  a  "person"  composed  of  a 
number  of  individuals.  The  stockholders  and  bondholders 
combined  constitute  the  "capitalist,"  but  the  function  of 
"venturer"  is  assumed  only  by  the  stockholders.  The  bond- 
holders are  part  of  the  capitalist,  pure  and  simple.  If  the 
company  is  solvent,  they  receive  the  stipulated  interest  income, 
no  more,  no  less.  But  the  share  of  the  stockholders,  taken  all 
together,  may  be  greater  or  less,  according  as  the  enterprise 
affords  a  profit  over  or  under  what  would  be  derived  from 
the  same  investment  at  the  current  rate  of  interest.  In 
addition  to  their  share  as  capitalist  they  come  in  for  chance 
profits  or  losses,  that  is,  for  such  balances  as  may  accrue,  be 
they  plus  pr  minus.  Their  minus  balances  may  possibly  wipe 
out  or  even  exceed  the  item  of  normal  capital  returns,  and  in 
the  event  of  adversity,  they  are  even  liable  to  the  extent  of 
the  principal  of  their  investment.  In  the  liquidation  of  a 
stock  company  all  liabilities,  including  the  bondholders'  claims, 
interest  as  well  as  principal,  must  be  paid  in  full  before  any 
share  accrues  to  the  stockholders.  In  any  case,  such  partici- 
pants as  are  not  included  in  the  capacity  of  venturer  will 
suffer  loss  only  if  the  total  share  of  those  who  are  so  included 
is  insufficient  to  cover  the  loss.  The  loss,  if  such  there  be, 
falls  primarily  on  those  individuals  who  participate  in  the 
capacity  of  venturer,  and  on  those  otherwise  interested  only 
when  the  loss  exceeds  the  holdings  of  the  former. 

146.  The  Employer. — "We  may  here  add  a  few  words  re- 
garding the  office  assumed  by  the  * '  employer. ' '    Considered  in 


147]  THE  TROCESS  OF  APPORTIONMENT  183 

the  economic  sense,  he  can  easily  be  conceived  apart  from  the 
function  of  capitalist.  But  his  position  is  inseparable  from 
either  manager  or  venturer.  We  shall,  for  this  reason,  use 
tlie  term  emploi/cr  as  embodying  these  two  functions  com- 
bined. In  this  classification  the  employer  as  such  is  in  no 
sense  capitalist,  although  in  practice  he  who  functionates  as 
employer  is  usually  also  capitalist  (167,  348). 

The  fact  that  the  various  functions  may  occur  in  various 
combinations  offers  no  difficulty  in  the  way  of  a  separate  ex- 
amination of  each  of  them  in  their  relation  to  the  process  of 
production  and  the  sharing  of  the  value  produced.  We  shall 
follow  the  classification  already  indicated,  according  to  which 
the  manager,  the  workman,  the  landlord,  the  capitalist  and 
the  venturer  are  separate  and  independent  entities.  Our  pur- 
pose is  to  find  how,  and  through  what  causes,  the  net  income 
of  the  industrial  group  is  divided  into  wages  and  profits,  and 
how  usages  as  well  as  profits  are  further  divided  and  shared 
among  the  respective  members  of  each  group. 

Nominally  this  division  is  determined  by  the  employer.  To 
all  appearances  he  decides  what  wages  to  pay  and  what  grade 
of  goods  to  buy.  He  pays  rent  and  interest  from  the  funds 
available  and  fixes  the  price  at  which  the  goods  made  are  to 
be  sold.  This  is,  however,  only  apparently  so.  As  the  buyer 
of  labor  and  of  the  supplies  he  must  come  to  an  agreement 
with  the  sellers.  As  a  seller  of  the  goods  made  he  must  meet 
the  views  of  the  buyers.  All  incomes  and  all  expenditures  of 
the  group  are  in  the  last  analysis  subject  to  the  law  of  supply 
and  demand,  to  the  inevitable  action  and  reaction  of  com- 
petition. 

147.  Competition,  the  Controlling  Force. — Among  the 
forces  which  are  active  in  determining  the  shares  of  the  several 
I)articipants  in  production,  competition  plays  an  important 
part. 

There  is  prevalent  a  considerable  difrerenee  of  opinion  as 
to  whf'ther  the  influence  of  competition  is  wholesome  or  detri- 
mental. While  it  is  largely  regarded  as  having  the  effect  of 
bringing  about  an  er|uital)le  distri])ution  of  tlie  value  produced 
by  industry,  it  is  frequently  held  responsible  for  the  fierce 


184  DISTRIBUTION  OF  WEALTH  [147 

struggle  between  employers  and  employed,  between  capital  and 
labor,  between  the  rich  and  the  poor,  between  the  strong  and 
the  weak,  giving  an  unfair  advantage  to  those  endowed  with 
wealth  or  possessed  of  exceptional  ability.  This  hostile  view 
of  competition  is  widespread  and  has  given  rise  to  volumes  of 
legislation  intended  to  curb  the  supposed  undue  powers  of 
the  rich  and  gifted.  Fear  of  competition  engenders  the  popu- 
lar sentiment  for  ' '  protective ' '  tariff,  for  restriction  on  immi- 
gration, for  regulation  of  convict  labor  and  the  like. 

In  the  face  of  such  conflicting  opinions  we  may  well  pause 
to  inquire  what  the  effect  of  competition  really  is,  and  why 
it  is  that  views  on  this  subject  are  so  divergent  (346). 

Before  any  headway  can  be  made  in  this  direction,  it  is 
necessary  to  know  precisely  what  competition  really  is.  Liter- 
ally it  means  an  endeavor  to  obtain  what  others  at  the  same 
time  are  trying  to  acquire.  Thus,  if  a  number  of  men  seek  to 
buy  something  of  which  the  supply  is  less  than  the  demand, 
there  will  ensue  a  bidding  up  among  the  buyers.  On  the  other 
hand,  if  a  number  of  men  have  for  sale  something  of  which  the 
demand  is  less  than  the  supply,  each  will  try  to  sell  his  stock 
by  underbidding  the  others.  Whether  the  competition  arises 
within  the  ranks  of  the  buyers  or  of  the  sellers  depends  on  the 
market  supply  of  the  particular  thing  in  question  in  con- 
junction with  the  effective  demand  therefor. 

Competition  can  be  fully  effective  only  where  commercial 
and  industrial  freedom  is  in  no  way  hampered  or  restrained ; 
it  becomes  more  or  less  inoperative  where  monopoly  or  other 
forms  of  restriction  prevail.  Since  the  effect  of  such  re- 
strictions will  be  the  subject  of  a  later  chapter,  we  shall  at 
present  consider  only  such  effects  of  competition  as  would 
follow  under  conditions  of  unrestricted  production  and 
exchange. 

Under  normal  conditions  each  worker  will  choose  that  occu- 
pation which,  according  to  his  inclination,  ability  and  oppor- 
tunities, will  yield  him  the  best  results.  If,  for  any  reason, 
the  output  of  various  occupations  is  not  in  proportion  to  the 
demand,  the  current  prices  of  the  various  goods  will  not  be  in 
proportion  to  the  efforts  of  production.    The  desire  of  men  to 


148]  THE  PROCESS  OF  APPORTIONMENT  185 

derive  the  greatest  income  from  their  labor  will  then  cause  an 
exodus  of  workers  from  the  overcrowded  branches  leading  to 
an  adjustment,  not  only  of  the  amounts  produced  in  all 
branches,  but  also  of  the  prices  (343). 

148.  Direct  Effects  of  Competition. — In  the  existing  con- 
dition of  any  of  the  arts,  industries  or  professions,  the  supply 
of  its  products  or  services  depends  ultimately  on  the  number 
of  men  employed  in  it,  and  this  number  is  regulated  in  two 
ways:  (1)  by  the  enlistment  of  the  rising  generation  in  that 
particular  trade  or  vocation  and  (2)  by  any  subsequent  change 
of  occupation,  or,  what  we  may  designate  as  "migration" 
from  that  vocation  to  others  and  vice  versa. 

So  long  as  the  recompense  in  all  the  different  vocations 
corresponds  in  the  main  with  the  effort  expended,  there  is 
no  special  inducement  for  Avorkers  to  migrate  from  one  to 
another,  and  although  there  may  be  some  shifting  of  workers, 
the  relative  supply  will  remain  unchanged.  Should  it  happen, 
however,  that  some  one  field  of  activity  appears  to  afford  an 
advantage  over  the  rest,  especially  if  for  some  reason  it  offers 
more  recompense  in  proportion  to  the  effort  required,  an  in- 
creased migration  toward  the  more  favored  occupation  will 
naturally  ensue.  On  the  other  hand,  if  some  one  occupation 
becomes,  for  any  reason,  less  remunerative  than  others,  always 
considering  the  required  effort,  migration  from  it  will  predomi- 
nate. The  relative  volume  of  supply  in  the  more  inviting 
branches  will  thus  be  increased,  while  in  those  in  which  dis- 
advantages arise  to  the  producer,  supply  will  be  lessened  (221), 

In  this  study  the  diagram  may  again  be  of  assistance.  Sup- 
pose Fig.  2  be  taken  to  represent  demand  and  supply  of  a 
given  commodity  in  a  given  market.  If,  then,  for  some  reason, 
no  more  than  the  (piantity  Oq'  is  produced  and  offered  in  the 
market,  the  competition  of  the  would-be  buyers  will  raise  the 
price  to  the  final  utility  q'd',  while  the  marginal  cost  of  pro- 
duction is  q's'.  This  constitutes  an  attraction  tliat  induces 
migration  toward  this  particular  occupation.  Supply  will 
therefore  be  increased  until  its  amount  reaches  Oq,  when 
marginal  cost  and  final  utility  become  e(|uali/ed.  If,  on  the 
other  hand,  the  original  supply  is  greater,  say  equal  to  Oq", 


186  DISTRIBUTION  OF  WEALTH  [i48 

the  final  utility  q"d"  will  be  less  than  the  marginal  cost  q"s", 
and  since  a  market  for  all  of  these  products  or  services  can  be 
found  only  at  a  price  equal  to  the  final  utility  q"d",  the  supply 
will  be  reduced,  by  migration  from  the  respective  occupation 
or  by  reduced  enlistment  of  apprentices,  until  the  normal 
amount  Oq  is  reached. 

The  primary  effect  of  competition  is  clearly  a  double  one. 
In  the  first  place,  l>y  drawing  workers  from  one  field  to  another, 
it  tends  to  adjust  the  supply  of  each  hranch  to  accord  with  the 
relative  demand  (366)  and,  in  the  second  place,  it  equalizes 
marginal  cost  of  production  and  Unal  utility,  both  becoming 
thereby  deteiininators  of  price. 

These  conclusions  clearly  show  the  folly  of  the  proposition, 
advocated  by  some  socialists,  to  establish  a  statistical  bureau 
with  power  to  regulate  the  amount  of  production  in  each 
trade,  so  as  to  avoid  congestion  of  the  market.  Only  free 
competition  can  properly  and  justly  regulate  the  volume  of 
production  and  exchange  in  the  various  branches  of  industry 
and  commerce. 

It  will  be  remembered  that  the  line  88'  of  Fig.  2  can  appear 
as  a  rising  curve  only  when  the  ''sellers'  price  limit"  is  con- 
sidered either  from  the  standpoint  of  the  land  owners,  or  that 
of  the  capitalists,  or  that  of  the  workers,  whether  employed  or 
employers.  In  each  case  the  curve  follows  a  different  course 
and  has  a  different  significance.  In  studying  the  effect  of  the 
competition  of  labor,  in  other  words,  the  effect  of  the  migra- 
tion of  workers  from  one  occupation  to  another,  on  the  volume 
of  the  supply  of  a  given  commodity,  the  curve  >S^*8"  must  be 
viewed  as  representing  all  the  different  price  limits  of  the 
workers  who  contribute  to  that  supply  (61).  The  various 
price  limits  are  determined  by  the  earning  capacity  of  the 
various  workers  in  their  various  occupations  of  second  choice, 
for  it  is  only  when  the  recompense  afforded  by  different  lines 
of  employment  changes  so  as  to  reverse  the  order  of  choice 
of  some  of  the  workers  that  migration  from  one  trade  to 
another  will  be  prompted.  The  difference  in  the  price  limits 
of  the  different  suppliers,  represented  by  the  various  ordinates 
of  the  rising  curve  88',  is  due  to  the  fact  that  among  the 


148]  THE  PROCESS  OF  APPORTIONMENT  187 

workers  in  the  one  pursuit  presented  by  the  curve  there  are 
always  some  who  can  turn  without  disadvantage  to  some  other 
pursuit,  while  the  rest  can  do  so  only  with  more  or  less  diffi- 
culty and  at  more  or  less  loss.  Those  who  are  equally  pro- 
ficient in  some  other  occupation  than  that  in  question  are  the 
first  to  turn  to  that  other  pursuit  whenever  some  cause  for 
such  change  arises.  It  is  these  shifting  ivorkers  who  are  the 
marginal  producers  in  their  particular  pursuit. 

Let  us  obtain  a  clear  conception  of  what  is  really  meant  by 
the  margin  as  regards  labor. 

According  to  definition  (62),  the  margin  is  where  pro- 
duction is  being  continued  at  the  greatest  cost  or  under  the 
most  unfavorable  circumstances ;  there  the  price  limit  or  ' '  cost ' ' 
equals  the  price,  as  indicated  at  the  point  a  of  the  diagram. 
The  marginal  worker  is  he  who  is  equally  efScient  in  two 
occupations.  He  was  among  the  last  of  those  who  entered  the 
field  of  his  present  employment  when  its  advantages  were 
rising,  and  is  among  the  first  to  leave  it  when  its  advantages 
decline. 

To  recapitulate :  Whenever  the  balance  of  advantages 
among  the  various  pursuits  is  disturbed  for  any  reason,  only 
such  workers  as  are  at  or  near  the  margin  are  apt  to  turn 
from  their  occupation  to  some  other.  Their  occupation  of 
first  and  second  choice  will  have  changed  places.  Migration 
from  one  field  of  effort  to  another  takes  place  principally 
among  the  workers  who  are  at  or  near  the  margin  of  pro- 
duction, as  indicated  at  a  of  the  diagram,  and  this  readjust- 
ment of  workers  is,  as  a  rule,  no  greater  than  is  sufficient  to 
bring  about  a  new  balance  (223).  It  is  through  the  marginal 
workers  and  those  who  are  near  the  margin  that  the  volume  of 
supply  is  regulated,  for  it  is  they  who  shift  from  one  occu- 
pation to  another  when  the  attendant  circumstances  change. 

Many  economists  consider  that  the  laborers  who  receive 
the  lowest  wages  are  the  marginal  workers  in  all  fields  of 
j)roduction,  but  this  is  a  mistake.  The  rate  of  wages  per 
hour  or  per  week  has  no  bearing  on  the  position  of  tli(^ 
workers  as  regards  the  margin  of  production,  for  this  rate 
measuics  only  individual  efficiency.     Of  two  workmen  in  tluj 


ISS  DISTRIBUnOX  OF  \^*IL\LTH  [U9 

same  trade  one  may  be  quick  and  intelligent  and  make  high 
wages,  not  only  in  that  trade,  but  also  in  that  other  occupa- 
tion to  which  he  can  turn,  while  the  other,  beiag  slow  and 
dull,  receives  but  low  wages  in  that  trade  or  in  any  other. 
Yet.  both  are  at  ilie  nmrgin  if  they  can  turn  at  will  from  one 
occupation  to  some  other.  So  are  the  workers  who  receive 
high  as  weU  as  those  who  receive  low  wages  icithin  //it  f7iargin 
of  the  pursuit  in  which  they  are  engaged,  if  they  cannot  turn 
to  some  other  occupation  at  equally  satisfactory  rec-ompense. 

149.  Indirect  Effects  of  Competition- — If  all  men  were 
equally  emcient  in  their  work  and  equally  intelligent,  and  if 
aU  occupations  were  equallv  arduous  and  equally  difficult  to 
master,  in  short,  if  aH  lines  of  work  were  alike  as  regards  the 
enort  reqtiired,  competition  would  tend  to  adjust  the  value  of 
all  products  so  as  to  be  proportionate  to  the  time  spent  in  pro- 
duction. An  intuitive  rec-ognrdon  of  this  has  given  rise  to 
the  doctrine  that  "'labor  is  the  real  measure  of  value."  which 
was  promulgated  by  Adam  Smith  and  subsequently  elaborated 
by  Eicardo.  Marx,  and  others  (30,  164). 

But  the  premises  are  not  altogether  in  harmony  with 
facts.  Xot  only  are  there  all  kinds  of  differences  in  the  char- 
acteristies,  qualities  and  capabilities  of  men,  but.  in  addition, 
some  occupations  are  more  irksome  than  others,  or  are  more 
dimcult  to  learn,  or  are  exposed  to  greater  risk  as  regards 
success,  or  are  more  dangerous  to  health  and  life.  The  more 
arduous  pursuits  as  well  as  those  involving  greater  risk  are 
avoided,  and  those  requiring  special  education  or  talent  are 
taken  up  by  fewer  individuals.  The  consequent  check  on  the 
supply  of  products  and  servic-es  in  these  pursuits  tends  to 
keep  pric-es  up  to  a  poiut  where  the  greater  gains  make  up  for 
the  greater  risk,  iifeomeness  or  other  sacrifice,  or  for  the 
more  efficient  exercise  of  faculties.  One  occupation  may  be 
more  remunerative  than  another,  but  being  more  disagree- 
able, or  more  dangerous,  or  requiring  more  time  and  effort 
for  its  mastery,  a  man  may  turn  to  the  less  remunerative  pur- 
suit as  his  first  ehoic-e  '  M).  Thus  it  is  not  gain  alone  that 
is  taken  into  ac-count  in  such  selection,  but  a  number  of  other 
factors  as  welL     Tke  difwuUy,  irksomeness  and  risk  of  any 


149]  THE  PROCESS  OF  APPORTIONMENT  189 

given  occupation  are  reflected  in  the  higher  price  of  its 
products. 

This  proposition  has  a  broad  range  of  application,  inas- 
much as  the  difficulties  in  question  may  be  of  a  most  varying 
description,  including  even  burdens  of  an  artificial  nature. 
If,  for  instance,  a  special  tax  is  put  on  the  production  of  a 
certain  class  of  goods,  their  producers  will  naturally  add  this 
expense  to  the  price  of  the  products.  If,  then,  consumers 
hesitate  to  buy  at  the  higher  price,  an  exodus  of  some  of  the 
producers  from  the  trade  will  follow,  resulting  in  a  reduction 
of  the  suppl3%  until  it  adapts  itself  to  the  reduced  demand. 
When  this  point  is  reached,  no  further  change  in  the  volume 
of  production  will  take  place  unless  the  equilibrium  is  again 
disturbed. 

This  process  of  readjustment  may  be  illustrated  by  dia- 
gram. Let  SS'  and  DD'  of  Fig.  12  represent  the  existing 
supply  and  demand  of  a  given  article.  The  price  then  equals 
qa,  and  the  quantity  supplied  equals  Oq.  But  if  to  the  cost 
of  production  an  additional  item  aST  is  added,  say  by  a  special 
tax,  the  supply  cuiwe,  which,  as  we  have  learned,  depends  on 
the  cost  of  production,  becomes  bodily  shifted  to  the  higher 
position  TT'.  An  adjustment  will  then  ensue  so  that  there- 
after the  price  will  equal  q'a'  and  the  amount  produced  Oq'. 

The  effect  may  be  summarized  as  follows: 

The  producers  located  between  the  points  q'  and  q  leave 
the  trade,  finding  other  occupations  more  attractive,  and  the 
quantity  produced  is  reduced  from  Oq  to  Oq',  the  intersection 
a'  indicating  the  new  margin.  The  price  q'a'  will  then  consist 
of  the  cost  of  production  q's'  at  the  new  margin,  plus  the  tax 
s'a'.  The  quantity  q's'  being  less  than  the  original  correspond- 
ing quantity  qa,  the  decrease  must  be  borne  by  the  workers ; 
in  other  words,  wages  in  that  trade  are  reduced  in  the  pro- 
portion in  which  q's'  is  less  than  qa. 

But  the  process  of  readjustment  will  not  end  there.  It  will 
be  remembered  that  the  different  ordinates  of  the  rising  curve 
SS'  represent  the  earning  capacity  of  the  workers  in  their 
various  occupations  of  second  choice,  that  is  to  say,  in  the 
occupations  to  which  they  may  take  recourse  as  an  alternative, 


190  DISTRIBUTION  OF  WEALTH  [149 

and  that  the  ordinates  of  the  branch  Sa  are  less  than  the 
normal  ordinate  qa  mainly  because  the  respective  workers  are 
competent  only  in  one  occupation  and  cannot  readily  turn  to 
some  other.  Wages  in  the  pursuit  under  consideration  having 
fallen,  as  shown  above,  the  affected  trade  will  become  less 
inviting  than  other  pursuits,  and  since  fewer  learnei's  will 
choose  it,*'  the  readjustment  will  continue  and  the  supply  will 
be  still  further  reduced,  until  the  marginal  producers  in  that 
line  again  obtain  a  recompense  equal  to  that  which  originally 
accrued  to  marginal  producers.  In  other  words,  the  curves 
SS'  and  TT'  will  be  changed  to  SS"  and  TT",  the  price  will  rise 
to  the  point  a",  and  production  will  be  reduced  to  the  voliune 
Oq".  The  marginal  cost  which  determines  the  price  q"a"  will 
then  be  made  up  of  q"s",  equal  to  the  former  marginal  cost, 
plus  the  tax  s"a".  This  shows  that  in  the  end  the  consumer 
pays  the  entire  tax. 

As  it  is  really  immaterial  what  kind  of  burden  it  may  be 
that  impedes  production,  we  are  justified  in  the  following 
conclusion : 

Whatever  impedes  production,  whether  it  he  the  difficulties 
inherent  in  the  work,  or  burdens  imposed  hy  law  or  custom,  has 
the  douUe  effect  of  increasing  the  price  and  of  reducing  the 
demand  for  that  product  (219,  220).  And  in  the  end  it  is  the 
consumer  and  not  the  producer  who  pays  for  every  increase  in 
the  difficulty  or  in  the  cost  of  production  (358). 

This  statement  does  not  imply  that  the  producer  in  no 
way  suffers  loss  on  this  account,  for  his  recompense  will  be 
reduced  whenever  for  any  reason  the  cost  of  production  is 
increased,  and  his  income  will  suffer  until  the  market  has 
adjusted  itself  to  the  new  conditions.  Of  the  period  of 
transition  we  shall  speak  later  (221).  Moreover,  the  above 
conclusion  is  inapplicable  when  the  new  conditions  do  not 
uniformly  affect  all  producers  in  the  same  line.  Thus,  if  a 
tax  or  other  exaction  is  unequally  imposed,  prices  respond  to 
the  extent  in  which  the  marginal  producer  is  affected. 

"  In  considering  the  original  curve  88'  as  representing  normal 
conditions,  it  is  of  course  implied  that  the  wage  qa  attracted  learners 
to  the  pursuit  in  question  in  a  degree  equal  to  that  of  other  pursuits. 


149]  THE  PROCESS  OF  APPORTIONMENT  191 

For  the  same  reason  that  artificial  as  well  as  natural  ob- 
stacles to  the  production  of  a  given  class  of  things  cause  an 
increase  in  their  prices,  a  removal  of  such  impediments  has 
the  effect  of  lowering  prices.  It  is  well  known  that  whenever 
the  difficulty  of  producing  any  given  commodity  is  lessened, 
be  it  by  the  introduction  of  better  systems  in  production  or 
of  new  inventions,  the  increased  supply  due  to  these  new  con- 
ditions causes  a  lowering  of  the  price,  which,  in  turn,  results 
in  an  increased  demand,  until  a  new  equilibrium  between  sup- 
ply and  demand  and  between  marginal  cost  and  final  utility 
becomes  established.  Although  the  producer  may  for  a  time 
reap  an  unusual  profit,  that  advantage  gradually  gives  way 
under  competition,  and  in  the  end  the  co)isumcrs  of  the  things 
of  which  production  has  heen  facilitated  reap  the  entire  benefit 
(192,243,368). 

This  conclusion  is  true  with  regard  to  all  forms  of  economic 
advantage.  For  instance,  a  by-product,  previously  valueless, 
may  become  valuable  when  a  use  is  found  for  it.  But  the 
producer  will  not  long  reap  an  increased  revenue,  since  the 
new  advantage  makes  the  business  attractive  to  others,  and  the 
increased  supply,  in  course  of  time,  reacts  upon  the  value  of 
the  total  output,  principal  as  well  as  by-product,  whereby  the 
benefit  is  again  transferred  from  the  producer  to  the  con- 
sumer. 

It  is  thus  manifest  that  competition  affects  the  value  of 
commodities  and  services,  no  matter  how  different  in  kind, 
so  as  to  make  their  values  proportionate  to  the  amount  and 
the  nature,  the  quaJitity  and  the  ([uality  of  the  efforts  expended. 

Efforts  of  the  same  kind  are,  of  course,  compared  on  basis 
of  their  results,  and  not  on  basis  of  the  time  expended  or  of 
the  physical  strength  applied.  And  where  the  efforts  are  dif- 
ferent in  kind,  as,  for  instance,  a  carpenter's,  a  musician's,  a 
lawyer's,  their  relative  market  value  is  determined  by  compe- 
tition, and  this  competition  finds  expression  in  migration  of 
marginal  workers  from  one  occupation  to  another,  whenever 
such  change  holds  out  better  prospects  to  the  worker.  The 
i-eiative  vahu;  of  any  two  different  fonns  of  service  is  thua 


192  DISTRIBUTION  OF  WEALTH  [150 

traceable  to  the  relative  estimation  of  the  marginal  workers, 
that  is,  workers  equally  skilled  in  both  occupations. 

Through  the  many  workers  who  are  in  position  to  turn 
from  their  occupation  to  some  other,  workers  who  are  near 
the  margin  in  their  present  line  of  effort,  this  pursuit  is 
brought  into  direct  competitive  relation  with  many  other  pur- 
suits, and  these  being  in  their  turn  in  similar  relation  with 
others,  a  competitive  relation  among  all  different  lines  of 
activity  is  established,  through  which  the  relative  market 
value  of  all  forms  of  service  becomes  adjusted. 

Still  another  eft'ect  of  competition  remains  to  be  touched 
upon,  namely  its  tendency  to  "put  the  right  man  into  the 
right  place. ' '  There  is  competition  not  only  among  workmen 
for  places  open  to  them,  but  also  among  employers  for  men 
to  fill  these  places.  Each  employer  must  therefore  pay  as 
high  wages  as  other  employers  are  prepared  to  offer.  And 
inasmuch  as  each  employer  naturally  seeks  to  utilize  the  pur- 
chased service  to  the  best  advantage,  the  tendency  is  to  place 
each  worker  into  the  position  of  his  greatest  efficiency.  It 
follows  that  competition  not  only  adjusts  the  relative  pay  for 
different  kinds  of  work,  but  also  assigns  to  each  worker  that 
place  for  which  he  is  best  adapted. 

150.  The  Law  of  Value  Presupposes  Free  Competition. 
— In  the  course  of  our  investigation  (63)  we  found  that  in  a 
normal  market  final  utility  and  marginal  cost  of  production 
are  equal  quantities  and  that  it  is  competition  which  brings 
about  this  equalization.  Where  competition  is  obstructed 
(225),  the  law  of  supply  and  demand  has  not  the  effect  of 
equalizing  marginal  cost  and  final  utility,  and  prices  rise 
above  marginal  cost.  Only  where  competition  is  free,  where 
there  is  nothing  to  interfere  with  the  free  choice  of  occupa- 
tion and  the  freedom  of  exchange  can  it  come  to  pass  that  the 
proceeds  from  the  sale  of  coats  are  equitably  shared  among 
the  shepherd,  the  spinner,  the  weaver,  the  tailor,  the  merchant 
and  all  those  who  assist  in  making  and  selling  coats,  and  this 
applies  with  equal  force  to  all  commodities  in  the  market 
(153). 

We  have  now  briefly  covered  the  field  of  competition  as  far 


151. 15^]   THE  PROCESS  OF  APPORTIONMENT  193 

as  it  relates  to  our  inquiry.  The  method  by  which  we  have 
reached  our  present  conclusions  is  that  of  strictly  logical  de- 
duction from  accepted  premises.  These  conclusions  are  in  sub- 
stantial agreement  with  the  tenets  of  that  school  of  economics 
which  holds  to  the  principle  of  laissez  faire.  We  have  not 
thus  far  turned  to  experience  to  verify  our  conclusions.  But 
when  we  do  so,  we  find  that  in  practice  they  do  not  seem  to 
be  uniformly  confirmed.  It  is  therefore  not  surprising  that 
the  prevailing  view  regarding  the  effect  of  competition  is  by  no 
means  in  harmony  with  the  conclusions  we  have  reached.  The 
discrepancies  call  for  explanation,  and  that  explanation  we 
shaU  find  in  the  course  of  our  further  inquiry  (342-346). 

151.  Apportionment  of  Proceeds  of  Production. — We  are 
now  prepared  to  go  more  fully  into  a  detailed  study  of  the 
double  process  of  distribution,  consisting  of  a  division  of  the 
proceeds  from  the  sale  of  consumption  goods,  first,  among  the 
contributing  groups,  and  second,  within  the  groups  among  the 
individual  participants  in  production  (127). 

This  division  is  effected  through  the  various  disposals  of 
the  gross  income  of  each  group.  Distribution  among  the 
groups  is  accomplished  through  payments  for  goods  or  ser- 
vices received  by  one  group  from  other  groups  (152),  while 
distribution  within  the  groups  is  realized  through  compensa- 
tion to  employes,  whether  in  the  form  of  wages,  salaries  or 
other  recompense,  through  payment  of  rent  to  the  owner  of 
the  land  used  if  this  land  is  rented,  and  through  payment  of 
interest  if  the  capital  goods  are  leased  or  if  money  has  been 
borrowed.  That  which  remains  goes  as  a  residual  share  to  the 
employer  or  to  the  owner  of  the  business.  It  follows,  of  course, 
that  if  the  employer  is  also  the  owner  of  the  land  or  of  the 
other  capital  in  use  or  both,  the  residual  share  will  include 
rent  or  interest  or  both. 

152.  The  Function  of  Capital  Goods  in  the  Apportion- 
ment.— While  in  the  modern  industrial  system  some  part  of 
the  work  of  production  is  performed  years  before  the  consump- 
tion products  can  become  available,  the  workei*s  who  perfonn 
that  part  receive  their  compensation  before  the  final  disposition 

13 


194  DISTRIBUTION  OF  WEALTH  [152 

of  the  products.  This  would  seem  to  conflict  with  the  proposi- 
tion that  the  recompense  for  this  labor  is  derived  from  the 
proceeds  of  the  sale  of  the  final  consumption  goods.  How  can 
the  proceeds  be  shared  before  they  are  realized? 

The  answer  to  this  question  is  not  far  to  seek.  We  are 
here  dealing  with  the  production  of  material  wealth.  In  the 
course  of  this  process  the  products  of  nature  are  transformed 
by  labor  into  commodities  which  have  a  market  value  even 
though  as  yet  unfit  for  final  consumption.  This  applies  as 
well  to  means  of  production,  like  looms  which  disappear  by 
wear,  as  to  goods  in  course  of  production,  like  yarns  which 
become  part  of  the  final  product  (132).  All  these  things 
should  be  looked  upon  as  partly  finished  consumption  goods. 
The  looms  as  well  as  the  yarns  are  partly  finished  garments. 
As  a  thing  is  industrially  advanced  from  stage  to  stage  by 
cooperative  groups,  or  by  workers  acting  as  such,  it  enters 
each  successive  process  either  as  a  means  of  production  or  as 
a  raw  material,  and  emerges  as  the  finished  product  of  the 
respective  group.  To  the  spinner  for  whom  the  yarns  are 
finished  goods,  the  wool  is  the  raw  material.  The  yams  are 
the  raw  material  of  the  weaver  who  finishes  the  cloth  which, 
in  turn,  is  the  raw  material  of  the  tailor.  The  spinner,  in 
buying  the  wool,  pays  for  the  work  which  the  shepherd  has  per- 
formed toward  the  making  of  the  coats.  The  weaver  pays  the 
spinner  a  price  for  the  yams  that  covers  the  recompense  for 
the  work  of  the  shepherd  as  well  as  the  spinner.  The  tailor,  in 
buying  the  cloth,  must  lay  out  the  shares  which  are  due  to 
shepherd,  spinner  and  weaver.  Each  successive  operator  in- 
vests in  the  partly  finished  coats  by  purchasing  the  raw 
materials,  expecting  to  be  reimbursed  for  this  outlay  and  for 
his  own  labor  by  the  sale  of  that  which  he  produces.  The 
payments  made  to  those  who  furnish  the  preceding  efforts 
are  manifestly  advance  payments,  to  be  finally  recovered  from 
the  price  of  the  coats.  This  is  true  as  regards  all  services  con- 
tributing to  the  production  of  the  final  goods — the  coats  of  our 
illustration — and  applies  to  the  earnings,  not  only  of  the  shep- 
herd, the  spinner,  the  weaver  and  the  tailor,  but  also  of  those 
who  make  the  sewing  thread  and  the  buttons,  of  the  iron  and 


153]  THE  PROCESS  OF  APPORTIONMENT  195 

coal  miners  who  supply  the  material  and  fuel  for  the  ma- 
chinery, of  the  builders  of  the  machines,  the  clerks,  book- 
keepers, salesmen,  and  so  forth. 

We  here  see  that  the  intermediate  or  immature  products, 
be  they  means  of  production  or  supplies,  perform,  as  carriers 
of  value,  an  important  part  in  the  distribution  of  the  proceeds 
from  the  final  products  (151).  Through  the  value  which  they 
carry-  the  preceding  efforts  are  paid  for  out  of  the  ultimate 
proceeds  before  these  proceeds  are  realized.  The  value  of  these 
unfinished  products  may  be  compared  with  charges  attached 
to  a  bill  of  lading.  The  charges  for  the  earlier  efforts  are 
carried  forward,  in  the  form  of  "value"  of  the  capital  goods. 
A  study  of  the  conditions  which  determine  these  values  must 
furnish  a  clue  to  the  rate  of  distribution  among  the  several 
groups  that  perform  the  several  operations, 

153.  The  Value  of  Capital  Goods. — If  we  seek  to  apply 
the  law  of  supply  and  demand  to  the  value  of  capital  goods, 
we  find  that  this  law  is  not  directly  applicable  to  that  value. 
We  have  heretofore  traced  demand  to  a  desire  for  gratification 
(58),  but  capital  goods  are  incapable  in  their  existing  form 
to  gratify  desires.  They  do  not  possess  "utility"  in  the 
sense  in  which  we  have  used  the  term,  namely  the  utility  of 
consumable  goods.  What  utility  they  possess  is  only  in  a 
latent  or  potential  state  and  as  such  is  not  available  for 
gratification.  We  must  accordingly  trace  the  demand  for  the 
intermediate  to  the  demand  for  the  final  goods.  So  long  as 
the  tailor  can  sell  coats,  he  will  buy  the  necessary  materials. 
The  resulting  demand  for  cloth  engenders  a  demand  for  yams, 
and  this  again  a  demand  for  wool.  So  must  the  demand  for 
looms  and  other  means  of  producing  cloth  be  traced  to  the 
demand  for  clothes.  This  latter  is  the  only  cause  of  demand 
for  all  the  materials  and  equipments  used  in  the  production  of 
the  clothes — or  whatever  the  final  products  may  be — and  the 
fjuestion  of  the  extent  to  which  this  demand  applies  to  each 
of  the  various  materials  and  equipments  that  enter  into  pro- 
duction is  the  proljlem  now  before  us. 

Thf  rpu'stion  of  the  value  of  immature  products,  and  par- 
ticularly ol"  means  of  [)ro(luction,  is  really  a  problem  by  itself. 


196  DISTRIBUTION  OF  WEALTH  [153 

The  incentive  that  creates  the  demand  can  be  traced  to  human 
desires  only  in  an  indirect  way.  The  demand  for  looms  on  the 
part  of  the  cloth  manufacturer  arises  from  his  confidence  that 
he  will  find  a  market  for  the  cloth  he  intends  to  have  made 
by  their  use,  and  the  demand  for  cloth  is  ultimately  due  to  the 
utility  of  the  apparel  to  be  made  from  it.  The  loom  is  the 
embodiment  of  certain  of  the  services  necessary  to  make  the 
thousands  of  coats  that  will  be  completed  through  its  use, 
and  these  services  are  gradually  transferred  from  the  loom 
to  the  cloth  as  the  loom  is  utilized,  at  the  average  rate  at  which 
the  loom  deteriorates  while  being  used  (10) .  At  the  same  time, 
the  potential  utilities  of  the  means  of  production  are  gradually 
converted  into  the  actual  utilities  possessed  by  the  final 
products. 

It  is  readily  to  be  seen  that  the  volume  of  demand  for 
capital  goods  cannot  respond  to  a  change  of  the  price  as 
readily  as  is  the  case  with  consumption  goods.  This  will  be 
found  especially  true  of  the  means  of  production  and,  likewise, 
of  the  goods  themselves  in  their  earlier  stages.  A  loom, 
for  example,  may  be  used  for  weaving  the  cloth  of  many 
thousands  of  coats.  For  this  reason  an  exceedingly  small  por- 
tion of  its  value  will  enter  into  the  price  of  one  coat.  The 
demand  for  looms,  as  we  have  seen,  is  governed  by  the  demand 
for  clothes,  and  this  demand  would  be  affected  very  slightly 
indeed,  if  the  cost  of  looms  were  doubled,  as  the  price  of  coats 
would  be  but  slightly  affected.  Nor  would  the  demand  for 
looms  be  noticeably  increased  if  their  value  were  reduced  to 
one-tenth.  We  have  clearly  to  deal  with  a  product  of  the 
kind  represented  in  Fig.  9  and  must  look  principally  to  mar- 
ginal cost  as  determinative  of  its  value  (64,  332).  We  should, 
accordingly,  concentrate  our  attention  on  the  conditions  that 
determine  the  marginal  cost  of  production.  While  the  value 
of  the  mature  product  is  determined  mainly  by  final  utility,  the 
value  of  the  intermediate  products — looms,  wool,  yams,  cloth 
and  so  forth — is  dependent  principally  on  marginal  effort. 
Whenever  the  prices  of  these  intermediate  products  are  such 
that  any  one  of  the  contributing  occupations  affords  less  recom- 
pense for  equal  effort  than  others,  a  migration  of  workers  from 


154]  THE  PROCESS  OF  APPORTIONMENT  197 

it  to  the  others  and  a  readjustment  of  prices  will  set  in  until  the 
compensation  of  each  trade  is  in  proportion  to  effort  put  forth. 

The  utility  theory  of  value  is  manifestly  inapplicable  to 
capital  goods.  Suppose  we  are  to  ascertain  the  value  of  a 
quantity  of  cloth  for  100  coats,  the  finishing  and  selling  of 
which  will  average  6  months.  According  to  this  theory  the 
value  of  the  cloth  is  the  discounted  value  of  the  future  utility 
of  this  cloth.  But  what  is  the  future  utility  of  this  quantity 
of  cloth?  The  nature  of  this  utility  is  certainly  that  of  coats, 
but  its  quantity  cannot  reasonably  be  held  to  equal  the  utility 
of  the  total  100  coats.  For  example,  suppose  the  value  of  a  coat 
is  $20.  The  value  of  the  cloth  will  then  surely  be  less  than 
$2000  discounted  at  6  per  cent,  per  annum,  that  is,  3  per  cent, 
for  the  half  year  required  for  completing  the  coats.  If  it  were 
that  amount,  namely  $1940,  the  tailor  who  pays  that  much 
when  he  buys  the  cloth  would,  by  selling  the  coats  six  months 
later,  get  back  only  the  purchase  price  with  interest,  but  noth- 
ing for  his  labor.  The  value  of  the  cloth  is  therefore  the  dis- 
counted value  of  fewer  than  one  hundred  coats.  But  how 
many  less?  What  is  to  determine  the  number?  Is  it  10  coats 
or  90  coats  or  some  number  between?  There  is  nothing  to 
go  by  unless  we  take  cognizance  of  effort  or  labor  as  co-ordinate 
with  utility  in  the  determination  of  this  question.  This  con- 
firms what  we  have  heretofore  noted  (62),  namely  that  the 
utility  theory  of  value  fails  to  trace  value  to  its  primary  factors. 

It  Is  now  clear  that  so  long  as  complete  freedom  of  com- 
petition prevails  and  workers  are  free  to  choose  their  occu- 
pation, the  division  of  the  proceeds  from  the  final  products 
among  the  contributing  groups — in  the  case  of  coats,  among 
the  groups  represented  by  shepherd,  spinner,  weaver,  tailor, 
merchant,  etc. — will  adjust  itself  in  proportion  to  the  relative 
difficulty  of  rendering  the  services  contributed  by  each  group 
(150,207). 

154.  Apportionment  within  Groups. — Let  the  line  AG  of 
Fig.  13  represent  the  gross  income  of  a  group.  This  amount 
is  divided  at  B  into  two  principal  parts,  the  first  of  which,  the 
"cost  of  supplies"  AB,  covers  the  payment  for  all  services 
obtained    from   other  groups   in   the  fonn  of  raw  materials, 


198  DISTRIBUTION  OF  WEALTH  [154 

supplies,  means  of  production,  etc.  The  other  part  BG,  which 
constitutes  the  "net  income"  of  the  group  and  represents  the 
vahie  produced  by  the  group,  is  the  fund  from  which  all 
forms  of  profit  and  all  forms  of  wages  are  ultimately  shared 
out  (127).  Of  this  net  income  a  portion  BC  goes  to  land  as 
rent,  another  portion  CE  goes  to  capital  goods  and  to  money 
as  interest,  and  the  remaining  portion  EG  goes  to  labor  as 
wages.  The  rate  at  which  this  division  takes  place  varies 
according  to  circumstances,  and  the  question  now  before  us  is : 
what  is  it  that  governs  this  division  and  determines  the  various 
shares  that  go  to  the  various  members  of  the  group?  There 
is  here  no  place  for  chance  profits,  because  these  are  in  the 
average  balanced  by  chance  losses. 

It  is  quite  apparent  that  the  gross  income  of  each  group, 
obtained  from  the  sale  of  its  products,  is  normally  divided  into 
four  principal  parts.  Of  these  the  portion  AB  goes  to  make 
up  the  gross  income  of  other  groups,  and  as  such  is  again 
similarly  divided.  But  since  the  group  which  first  derives 
the  raw  material  from  nature  has  no  charges  corresponding  to 
AB  to  pay,  the  sum  total  paid  by  the  consumers  for  the  final 
products  is,  in  the  last  analysis,  divided  into  rent,  interest 
and  wages,  of  which  the  first  two  are  to  be  classed  as  capital 
profits. 

This  brings  us  face  to  face  with  the  essence  of  the  problem. 
What  is  it  that  determines  this  division? 

We  already  know  that  the  first  division  at  B  is  regulated  by 
competition.  But  if  we  attempt  to  learn  at  what  rate  the  net 
income  BG  oi  each  group  is  divided  into  capital  profits  and 
wages,  we  discover  that  the  law  of  competition  does  not  apply, 
since  the  services  rendered  by  labor  are  radically  different  from 
those  rendered  by  capital,  the  former  being  personal,  the  latter 
impersonal.  There  can  he  no  competition  between  capital  and 
labor.  Industrial  migration,  which  is  the  principal  factor 
of  competition,  may  take  place  between  any  two  lines  of 
activity.  A  man  may  be  in  a  position  to  choose  between 
teaching  philosophy  and  laying  bricks,  if  these  happen  to  be 
his  occupations  of  first  and  second  choice.  But  between  such 
service  as  that  rendered  by  labor  and  that  rendered  by  capital 


155]  THE  PROCESS  OF  APPORTIONMENT  199 

there  is  no  alternative.  The  sharing  of  the  proceeds  of  indus- 
try between  capital  and  labor,  the  divis-ion  into  profits  and 
wages,  cannot  therefore  be  regulated  by  competition.  We 
must  look  further  for  the  economic  forces  which  determine 
this  division,  or  for  some  common  ground  on  which  to  compare 
the  two  kinds  of  service  (180). 

By  furnishing  capital  to  a  group  of  workers  the  capitalist 
becomes  a  participant  in  production,  and  as  such  he  is  entitled 
to  a  share  of  the  product.    But  to  what  extent  does  his  title  go  ? 

It  is  self-evident  that  he  is  primarily  entitled,  beyond  all 
risk,  to  a  return  of  the  full  value  which  he  contributes.  We 
know,  however,  from  experience,  that  the  share  he  receives  is 
more  than  the  amount  of  the  capital  he  has  furnished.  What 
he  actually  gets  is  (1)  compensation  for  wear  and  tear  and 
for  risk  of  loss,  which  tend  to  maintain  undiminished  the  value 
he  has  furnished ;  and  beyond  these  obvious  items  he  obtains  (2) 
compensation  for  the  use  of  capital,  or  capital  profits,  the  real 
nature  of  which  is  not  so  obvious.  It  accrues  for  that  service 
of  the  capitalist  which  consists  in  surrendering  the  use  of  his 
wealth,  whether  consisting  of  land,  of  capital  goods  or  of  money 
(265),  and  this  is  an  impersonal  service.  How  this  service  of 
the  capitalist  is  to  be  compared  with  the  service  of  the  workers 
who  give  their  labor  remains  to  be  learned. 

That  the  division  of  the  net  income  of  a  group  into  wages 
and  capital  profits  does  not  occur  at  a  constant  rate  is  plain 
enough.  In  some  trades  only  a  small  amount  of  capital  can  be 
advantageously  employed.  The  tools  of  a  bricklayer  are  few 
and  simple.  In  trades  of  this  kind  practically  the  entire  net 
income  becomes  wages.  In  other  enterprises  a  larger  amount  of 
capital  is  needed  in  proportion  to  labor,  and  in  these  a  pro- 
portionately greater  part  of  the  net  income  goes  to  capital. 

155.  Economic  Relations  of  Labor  and  Capital. — In  view 
of  the  general  uniformity  of  the  rate  of  capital  returns  in  all 
the  ordinary  fields  of  production  there  can  be  no  doubt  that 
certain  definite  forces  are  at  work  that  govern  the  apportion- 
ment of  the  not  income  of  the  productive  group  between  capital 
and  labor.    What  are  these  forces  and  how  do  they  operate  ? 

Let  us  turn  again  tr)  the  diagram  Fig.  13  in  which  the  divi- 


200  DISTRIBUTION  OF  WEALTH  [156 

sion  of  the  net  income  BG  into  profits  and  wages  is  marked  by 
the  point  E.  What  is  it  that  determines  the  position  of  that 
point?  All  we  know,  to  start  with,  is  that  profits  and  wages 
together  make  up  the  sum  total  BG  oi  the  net  income.  In  the 
terminology  of  mathematics,  we  have  two  unknown  quantities 
and  thus  far  only  one  equation.  We  are  to  find  the  quantities 
BE  and  EG  and  as  yet  we  know  only  their  sum  BG.  A  second 
equation  is  necessary  to  find  how  that  sum  is  divided.  We  must 
find  either  what  it  is  that  determines  the  rate  of  interest  and 
accordingly  the  share  BE  of  capital,  leaving  the  balance  EG 
to  labor;  or  else,  what  it  is  that  determines  the  share  EG  of 
labor,  leaving  the  balance  BE  to  capital.  Is  it  the  share  of 
capital  or  that  of  labor  which  comes  first  (160,  267)  ? 

As  a  first  step  in  this  inquiiy,  we  must  find  how  the  produc- 
tivity of  labor  is  affected  by  the  employment  of  different 
amounts  of  capital. 

156.  Influence  of  Capital  on  the  Productivity  of  Labor. — 
In  producing  any  given  kind  of  commodity,  various  methods 
and  modifications  of  methods  can  be  adopted,  some  being  more, 
others  less  effective  (10a).  It  is  generally  found  that  the  effi- 
ciency of  labor  is  enhanced  with  the  extension  of  specialization 
and  with  the  application  of  more  complex  means  of  produc- 
tion, and  that  each  advance  in  this  direction  is  attended  by  the 
employment  of  a  larger  amount  of  capital. 

But  that  the  efficiency  of  labor  increases  with  the  amount 
of  capital  employed  is  true  only  up  to  a  certain  point.  The 
employer  of  a  given  amount  of  labor,  say  one  hundred  men, 
cannot  indefinitely  increase  the  output  of  this  labor  by  addi- 
tions to  his  capital,  for  in  time  he  will  reach  a  point  of  "dimin- 
ishing returns,"  that  is,  a  point  beyond  which  a  further  in- 
crease of  capital  actually  results  in  diminishing  the  produc- 
tivity of  the  labor  employed  (106).  Machines  may  become 
so  intricate  in  the  effort  to  make  them  more  completely  auto- 
matic that  the  extra  cost  of  construction,  operation  and  repair 
will  exceed  the  benefit  that  may  be  derived  from  the  attempted 
improvements.  Or  the  division  of  labor  may  be  carried  so  far 
that  the  increased  cost  of  handling  the  goods  exceeds  the  sav- 
ing of  labor  attained  by  the  last  step  in  the  specialization. 


157]  THE  PROCESS  OF  APPORTIONMENT  201 

157.  Graphical  Analysis. — The  relation  that  exists  between 
the  efficiency  of  labor  and  the  amount  of  capital  employed 
may  be  represented  graphically.  The  yearly  production  of  a 
certain  amount  of  labor,  say  of  one  hundred  men,  working 
with  a  varying  amount  of  capital,  may  be  indicated  by  the 
curve  PP'  of  Fig.  14,  in  which  the  horizontal  dimension  meas- 
ures the  amount  of  capital  employed,  and  the  vertical  dimen- 
sion the  corresponding  amount  produced.*® 

Working  with  practically  no  tools,  the  efficiency  OP  is  very 
small.  As  the  amount  of  capital  is  increased,  the  amount  pro- 
duced by  that  labor  also  becomes  greater,  and  the  graphical 
representation  of  this  condition  takes  the  form  of  a  rising 
curve.  According  to  experience,  this  rise  of  the  curve  becomes 
gradually  less,  until,  bej'ond  the  point  p,  the  cur\'e  takes  a 
downward  direction.  This  point  of  the  curve,  which  marks  the 
point  of  diminishing  returns,  also  marks  the  greatest  possible 
productivity  attainable  through  the  given  amount  of  labor, 
the  corresponding  amount  of  capital  being  equal  to  OC. 

This  curve  PP'  is  assumed  to  refer  to  a  given  trade  and  to  a 
given  state  of  the  art.  If  by  further  discoveries  and  inventions 
the  state  of  the  industry  is  advanced,  the  curve  will  change  its 
course  accordingly.  This  contingency  is  here  left  out  of  con- 
sideration, as  we  must  necessarily  start  from  some  definite 
premise.  Moreover,  it  is  here  assumed  that  the  capital  is  used 
intelligently  and  that  the  best  method  of  production  consistent 
with  the  amount  of  capital  in  question  is  selected.  It  is  obvious 
that  an  incompetent  employer  may,  in  his  ignorance,  increase 
the  amount  of  capital,  without  thereby  increasing  the  efficiencj^ 

"  When  we  speak  of  the  amount  produced  6y  the  efforts  of  a  given 
group  of  producers,  this  does  not  mean  the  gross  value  of  the  products 
turned  out,  but  only  that  part  of  this  value  which  is  due  to  the 
Hcrvices  rendered  by  the  members  of  that  group.  From  the  gross  value 
is  to  be  deducted  all  that  is  jiaid  to  contributing  groups  for  means  of 
production,  raw  material  and  otlicr  supplies  or  services.  It  is  particu- 
larly to  be  observed  that  in  tlie  amount  so  deducted  are  to  be  included 
the  items  which  go  as  amortization  and  as  insurance  to  the  capitalist 
of  the  group.  The  latter,  in  his  caj)acity  as  supplier  of  the  capital 
produced  by  other  groups,  is  in  a  position  outside  of  the  group  in  which 
he  is  a  member  only  as  owner  of  the  capital  goods  supplied    (205). 


202  DISTRIBUTION  OF  WEALTH  [158 

of  the  employed  labor.  Such  ineffective  utilization  of  capital 
is  here,  of  course,  not  to  be  considered. 

158.  Effect  of  a  Varying  Interest  Rate. — At  first  glance 
it  may  appear  that  the  amount  of  capital  most  advantageously 
employed  with  the  given  amount  of  labor  is  OC  (Fig.  14),  be- 
cause with  this  combination  the  greatest  amount  of  goods  will 
be  produced.  A  brief  consideration  will,  however,  reveal  that 
this  is  not  the  case.  Capital  demands  a  return  on  the  basis 
of  the  current  rate  of  interest,  and  the  employer  has  therefore 
to  consider  the  cost  of  employing  capital  as  well  as  the  cost 
of  employing  labor  ( 160) . 

Suppose,  now,  that  on  the  basis  of  the  current  rate  of  in- 
terest the  return  demanded  by  an  amount  of  capital  equal  to 
OC  is  equal  to  Ci^^  After  deducting  this  amount  Ci  from  the 
total  proceeds  Cp,  the  employer  will  have  left  an  amount  equal 
to  ip,  from  which  he  must  defray  the  wages  of  the  employes, 
the  remainder  being  his  own  wages. 

If  a  smaller  amount  of  capital  is  employed,  the  share  going 
to  capital  is,  of  course,  correspondingly  less.  The  inclined  line 
Oi  indicates  this  variable  share.  If  the  employer  applies  an 
amount  of  capital  equal  to  OC,  the  cost  of  the  use  of  this  capital 
is  Ci',  and  the  residual  share  is  i'p'  instead  of  ip. 

A  glance  at  the  diagram  shows  that  i'p'  exceeds  ip,  which 
means  an  increased  revenue  to  the  employer.  Indeed,  the  in- 
come of  the  employer  is  greatest  if  he  uses  an  amount  of  capital 
OC,  corresponding  to  that  point  p'  of  the  curve  PP'  at  which 
the  tangent  is  parallel  to  the  line  Oi  (161).  This,  then,  is  the 
most  advantageous  combination  of  capital  and  labor  from  the 
standpoint  of  the  employer,  for  although  labor  is  at  this  point 
not  employed  at  its  maximum  efficiency,  his  personal  wages 
as  manager  will  then  be  greatest  (267,  347). 

Were  the  rate  of  interest  liigher,  so  that  CI  represented 

"  In  order  to  avoid  a  too  great  elongation  of  the  diagram,  its 
horizontal  dimension,  measuring  the  capital  employed,  is  on  a  smaller 
scale  than  the  vertical,  -which  measures  the  value  of  the  products.  Tliis 
must  be  remembered  in  comparing  the  two  dimensions,  as  otherwise 
the  rate  of  interest  graphically  represented  must  appear  out  of  pro- 
portion. 


159]  THE  PROCESS  OF  APPORTIONMENT  203 

the  charges  for  the  use  of  the  capital  OC,  the  higher  rate  would 
cause  the  employer  to  use  capital  more  sparingly.  His  own 
interest  would  be  served  best  by  limiting  the  amount  of  capital 
employed  to  OC",  the  point  C"  being  found  by  locating  on  the 
curve  PP'  that  point  p"  where  the  tangent  is  parallel  to  the 
line  01.  The  productivity  of  the  given  amount  of  labor  would 
then  be  C"p",  which  is  divided  by  the  point  I",  the  lower  sec- 
tion C"I"  being  the  share  due  to  the  invested  capital,  the 
remainder,  namely  T'p",  being  available  for  wages,  to  be 
shared  between  employer  and  employed. 

159.  Effect  of  Interest  Rate  on  Wages. — These  considera- 
tions point  out  the  influence  which  the  rate  of  interest  has  upon 
wages.  A  high  rate  of  interest  keeps  wages  at  a  low  level  for 
two  reasons.  In  the  first  place,  the  more  restricted  use  of 
capital  entails  a  lessening  of  the  amount  that  can  be  produced 
by  a  given  amount  of  labor,  the  reduction  in  our  illustration 
being  from  C'p  to  C"p"  (Fig.  14) ,  which  simply  means  a  reduc- 
tion of  the  efficiency  of  labor  (262).  In  the  second  place,  a 
greater  proportionate  share  of  the  value  produced  accrues  to 
capital,  and  a  correspondingly  smaller  share  to  labor.  A  low 
rate  of  interest  has,  of  course,  the  opposite  effect  (318),  but 
the  employer  would  not  be  justified  in  increasing  the  amount 
of  capital  to  OC,  unless  the  interest  rate  were  to  fall  to  nil, 
when  the  productivity  of  labor  would  be  raised  to  its  natural 
maximum  Cp,  and  the  entire  product  would  become  wages. 

The  proposition  that  a  high  rate  of  interest  means  low 
wages,  and  vice  versa,  although  repeatedly  advanced,  has  as 
often  been  contested  on  the  ground  that  in  prosperous  timesi 
both  wages  and  interest  are  found  to  be  high,  while  during 
periods  of  business  depression  both  forms  of  income  are  low. 
From  this  it  is  inferred  that  the  same  cause  which  makes  in- 
terest high  makes  wages  high,  and  vice  versa.  But  we  are  here 
not  speaking  of  the  difference  between  good  times  and  bad 
times.  It  is  quite  obvious  that  when  through  any  cause  the 
total  of  production  is  reduced,  there  is  less  to  be  divided 
between  caj)ital  and  labor,  and  both  must  accept  correspond- 
ingly low  returns.  And  when,  the  amount  of  production  is 
groat,  as  is  the  case  Avhon  times  are  prosperous,  the  greater 


204  DISTRIBUTION  OF  WEALTH  [160 

total  product  affords  larger  returns  to  both.  We  have  here 
under  consideration  the  effect  of  a  varying  rate  of  interest 
upon  wages  while  all  other  things  remain  equal.  The  amount 
actually  produced  within  a  certain  time  being  given,  it  is  self- 
evident  that  if  a  greater  share  goes  to  capital,  a  smaller  share 
is  left  for  labor,  and  vice  versa.  In  this  division  of  the  net 
income  BG  (Fig.  13)  any  increase  of  the  share  BE  accruing 
as  profit  to  capital  necessarily  entails  a  reduction  of  the  share 
EG  accruing  to  labor. 

1 60.  Effect  of  a  Varying  Wage  Rate. — The  foregoing  ex- 
amination of  the  effect  of  changes  in  the  interest  rate  on  the 
productivity  of  labor  has  brought  us  no  nearer  to  the  solution 
of  our  problem,  which  is  to  find  the  causes  that  determine  the 
respective  allotments  to  labor  and  to  capital,  for  we  assumed 
the  rate  of  interest  as  given.  Wages  were  accordingly  sup- 
posed to  consist  of  the  remainder  of  the  proceeds  after  capital 
profits  had  been  paid,  which  means  that  capital  profits  come 
first.  But  at  the  present  stage  of  our  inquiry  we  have  not  yet 
found  whether  capital  profits  or  wages  take  precedence  (155). 

Let  us  assume  now  that  it  is  the  share  of  labor  EG  of  Fig.  13 
which  comes  first  and  that  the  wages  of  the  one  hundred  men 
of  our  illustration  are  represented  by  the  ordinate  OW  of 
Fig.  15,  in  which  the  curve  PP'  is  again  u>sed  to  represent  their 
varying  productivity,  according  as  they  work  with  a  smaller 
or  larger  amomit  of  capital.  In  this  event  it  is  the  owner 
of  the  capital  who  gets  the  residual  share,  and  it  is  accordingly 
in  the  interest  of  that  owner  that  only  so  much  of  capital  is 
employed  as  will  bring  the  greatest  rate  of  returns. 

The  ordinate  OW  of  the  horizontal  line  WW  indicates  what 
portion  of  the  total  value  produced  must  be  paid  to  labor,  only 
the  balance  remaining  as  profits.  Hence,  by  employing  the 
amount  of  capital  OC,  the  total  product  will  amount  to  Cp, 
of  which  the  share  CW"  goes  to  labor  and  the  remainder  W"p 
to  capital.  The  rate  of  this  profit  is  expressed  by  the  ratio 
W"p  to  WW",  and  if  the  line  Wp  is  drawn,  its  slope  is  a 
measure  of  this  ratio. 

In  analyzing  the  preceding  case  (158),  we  found  that  it  was 
not  to  the  bast  advantage  of  the  employer  to  use  the  amount  of 


161]  THE  PROCESS  OF  APPORTIONMENT  205 

capital  OC,  by  means  of  which  the  maximum  productivity  Cp 
is  attainable.  In  the  present  case  tJie  same  is  true  as  regards 
the  best  advantage  of  the  capitalist.  When  the  lesser  amount 
of  capital  OC  is  used,  the  rate  of  profit  on  this  invested  capital 
is  indicated  by  the  slope  of  the  line  Wp'.  Although  the  share 
W'p'  on  the  smaller  investment  is  less  than  W"p,  the  rate  of 
profits  is  noticeably  greater. 

"Were  the  wage  rate  lower,  so  that  the  total  wages  of  the 
labor  employed  would  be  Ow,  the  capitalist  would  find  it  most 
advantageous  to  employ  no  more  capital  than  OC",  for  the 
greatest  rate  of  profits  obtainable  under  the  circumstances 
would  be  indicated  by  the  inclination  of  the  line  wp'\ 

It  is  clear  that  wages  vary  inversely  as  the  interest  rate, 
whether  the  one  or  the  other  has  the  precedence ;  and  further- 
more, when  interest  is  high,  it  pays  best  to  use  cheap  tools  and 
cheap  labor,  in  other  words,  to  adopt  comparatively  inefficient 
methods  of  production.  On  the  other  hand,  a  low  interest  rate 
and  high  Avages  are  coincident  with  a  high  order  of  industrial 
development. 

i6i.  Graphical  Analysis  by  Differentiated  Function. — 
In  Figs.  14  and  15  the  curve  PP'  shows  how  the  productivity  of 
a  given  amount  of  labor  depends  on  the  amount  of  capital 
utilized.  Productivity  is  there  represented  by  the  ordinates 
of  the  curve  PP',  and  therefore  by  linear  dimensions.  But 
some  features  of  the  ease  can  be  studied  to  better  advantage  if 
productivity  is  represented  in  a  differentiated  form,  in  which 
event  it  is  measured  by  an  area  instead  of  a  line. 

In  Fig.  16  the  descending  curve  EE'  represents  what  is 
known  in  mathematics  as  the  differential  of  the  function 
depicted  by  the  curve  PP'  of  Fig.  14.  Both  curves  have  really 
the  same  significance,  but  each  must  be  interpreted  in  its 
own  way. 

Let  us  suppose  that  the  capital  is  provided  in  instalments 
Oa,  ah,  he  and  so  forth.  The  curve  EE'  then  indicates  the  suc- 
cessive increments  of  productivity  due  to  the  consecutive  in- 
crements of  capital,  while,  as  will  be  remembered,  the  curve 
PP'  of  Fig.  14  is  plotted  so  as  to  show  the  total  productivity 
attained  l)y  the  use  of  the  respective  amounts  of  capital  fur- 


206  DISTRIBUTION  OF  WEALTH  [lei 

nished.  Consequently,  in  order  to  find  in  Fig.  16  the  total 
annual  output  of  the  given  amount  of  labor  with  any  given 
amount  of  capital,  it  is  necessary  to  add  up  the  successive 
increments  of  productivity,  and  this  sum  is  necessarily  an  area, 
not  merely  a  linear  measurement,  as  in  Fig.  14. 

When  unaided  labor  is  supplied  with  the  first  instalment 
Oa  of  capital,  its  efficiency  is  increased  materially,  and  this 
increase  is  shown  in  Fig.  16  by  the  ordinate  aa',^^  and  in  Fig.  14 
by  a  very  rapid  rise  of  the  curve  PP'  at  the  point  a'.  The  gain 
from  a  second  equal  instalment  ab  is  somewhat  less,  as  showTi 
by  the  smaller  ordinate  hh'  in  Fig.  16,  and  by  a  less  rapid  rise 
of  the  curve  PP'  of  Fig.  14  at  the  point  &'.  The  effect  of  addi- 
tional instalments  is  similarly  shown  by  the  continually  de- 
creasing ordinates  of  the  curve  EE'  of  Fig.  16,  and  by  the  con- 
stantly diminishing  ascent  of  the  curve  PP'  of  Fig.  14.  When 
the  capital  reaches  the  amount  OC,  further  additions  can  no 
longer  increase  the  output,  and  this  is  indicated  in  Fig.  16  by 
the  curve  EE'  reaching  the  base  line,  and  in  Fig.  14  by  the 
curve  PP'  ceasing  to  rise. 

The  difference  in  the  way  of  interpreting  the  two  diagrams 
can  now  be  briefly  summarized.  If  the  one  hundred  men, 
adopted  in  the  illustration  as  the  given  amount  of  labor,  are 
provided  with  an  amount  of  capital  equal  to  OC",  the  annual 
output  of  this  labor  is  measured  in  Fig.  14  by  the  linear  dimen- 
sion C"p",  and  in  Fig.  16  by  the  area  OC"e"E.  Or  if  OC  is 
the  amount  of  capital  supplied,  the  yearly  production  is  meas- 
ured by  the  line  C'p'  and  the  area  OC'e'E,  respectively. 

When  we  applied  the  diagram  Fig.  14  to  an  analysis  of  the 
case  in  which  Ci  was  the  interest  charge  for  the  use  of  the 
capital  OC,  we  found  that  it  would  pay  the  employer  best  to 
use  an  amount  of  capital  equal  to  OC  (168).  This  is  con- 
firmed by  a  study  of  Fig.  16.  Let  us  suppose  the  employer 
has  invested  an  amount  of  capital  equal  to  OC",  while  the  rate 
of  interest  equals  Oi.  The  total  annual  product  of  labor  and 
capital  combined  will  then  be  represented  by  the  area  OC"e"E, 

'*"  strictly  speaking,  the  increase  is  measured  by  the  area  of  the 
trapezoid  Oaa'E. 


161]  THE  PROCESS  OF  APPORTIONMENT  207 

of  which  the  area  OC"i"i  represents  the  interest  due  on  the 
invested  capital.  The  portion  of  the  total  output  represented 
by  the  area  ii"e"E  is  thus  left  to  the  employer  for  paying 
wages  and  for  his  OAvn  recompense  as  manager. 

When  considering  the  question  of  using  improved  machin- 
Qrx,  or,  in  other  words,  more  capital  with  the  same  amount  of 
labor,  the  employer  finds  that,  by  adding  the  amount  C"C\ 
production  is  increased  by  the  area  C'C'e'e" ,  indicated 
by  shading  in  Fig.  17,  while  the  interest  he  must  pay 
for  the  additional  capital  equals  the  area  C'C'e'i".  This  addi- 
tion of  capital  is  obviously  of  advantage  to  him,  as  there  is 
a  net  gain  equal  to  the  area  i"e'e".  He  accordingly  finds  it 
profitable  to  increase  the  total  amount  of  his  capital  to  OC 
As  every  such  gain  in  production  increases  his  personal  share, 
he  naturally  seeks  to  use  the  most  advantageous  combination  of 
capital  and  labor. 

When  the  amount  of  capital  employed  is  equal  to  OC,  the 
total  value  produced  annually  by  the  one  hundred  men  is 
OC'e'E,  which  is  divided  into  two  parts  by  the  line  ie',  the 
lower  area  being  charges  for  the  use  of  the  capital,  the  upper 
area  being  wages.    This  division  is  shown  by  shading  in  Fig.  18. 

If  the  employer  endeavors  to  increase  the  efficiency  of  the 
given  amount  of  labor  by  yet  further  improvements,  he  finds 
that  the  additional  capital  C'C  would  enhance  production 
only  by  the  amount  indicated  by  the  area  C'Ce\  Fig.  19,  while 
the  charge  for  this  additional  capital  would  be  represented 
by  the  area  C'Ci'e'.  As  the  diagram  shows,  this  charge  would 
then  exceed  the  gain,  and  it  would  manifestly  be  unprofitable 
to  employ  more  capital  than  the  amount  OC.  Of  course,  if 
he  has  more  capital  to  invest,  he  refrains  from  adding  improve- 
ments that  do  not  pay,  but  extends  his  business  on  the  existing 
plan  and  employs  more  labor. 

It  is  now  clear  that  if  the  efficiency  curve  E.E',  Fig,  16,  and 
the  rate  of  interest  Oi  are  given,  then  the  intersection  e'  of  the 
horizontal  line  ii'  with  the  efficiency  curve  EE'  is  the  point 
which  indicates  the  amount  of  capital  OC  that  can  be  most 
profitably  employed  with  the  given  amount  of  labor. 

The  employer  seeks  to  establish  in  his  works  tiie  corre- 


208  DISTRIBUTION  OF  WEALTH  [i62 

spending  mode  of  production.  At  this  point  a  small  increment 
of  capital  increases  production  by  an  amount  equal  to  the 
additional  interest,  and,  for  a  like  reason,  a  small  addition  to 
labor  increases  the  output  by  an  amount  equal  to  its  cost; 
in  other  words,  one  dollar  spent  as  interest  for  more  capital 
has  the  same  effect  on  the  output  as  one  dollar  spent  as  wages 
for  more  labor.  However,  the  conditions  responsible  for  that 
equality  cannot  be  regarded  as  governing  the  rate  of  interest, 
since  in  the  determination  of  this  point  the  rate  of  interest  was 
assumed. 

We  proceeded  on  the  assumption  that  the  capital  is  made 
up  by  adding  one  instalment  after  another.  But  this  is  fre- 
quently impracticable.  Where,  for  instance,  the  capital  is  in 
the  form  of  machinery,  the  addition  of  another  instalment 
might  mean  the  replacement  of  the  machines  by  others  which 
are  more  efficient,  but  also  more  costly,  and  this  change  can- 
not be  effected  by  merely  supplying  an  amount  of  money  equal 
to  the  difference  in  cost.  This  would  seem  to  invalidate  our 
conclusions.  But  it  must  be  considered  that  machines  wear 
out  and  that  the  additional  capital  can  be  made  use  of  by  re- 
placing those  worn  out  with  the  improved.  The  problem  of 
increasing  the  existing  capital  by  an  additional  instalment 
thus  becomes  merely  a  question  of  time,  and  the  conclusions 
deduced  above  remain  valid,  at  least  in  the  long  run. 

162.  Final  Efficiency  of  Capital. — In  applying  the  dia- 
grams Figs,  14  and  16  to  the  study  of  the  relation  of  interest 
and  wages  to  the  amount  of  capital  and  labor  employed,  we 
assumed  the  current  rate  of  interest  to  be  given,  and  found 
that  the  interest  charge  makes  it  unprofitable  to  employ  more 
than  a  certain  proportionate  amount  of  capital  with  a  given 
amount  of  labor,  and  that,  in  consequence,  labor  fails  to 
develop  its  maximum  efficiency.  But  so  far  we  have  no  clue  as 
to  why  capital  commands  interest. 

It  is  generally  recognized  that  with  the  gradual  increase 
of  capital  available  for  use  its  interest  commanding  power  has 
declined.  This  would  seem  to  indicate  that  it  is  an  insufficiency 
of  available  capital  that  accounts  for  interest  instead  of  in- 
terest accounting  for  the  sparing  use  of  capital.     The  fact 


162]         THE  PROCESS  OF  APPORTIONMENT  209 

that  capital  now  commands  a  revenue  would  accordingly 
signify  that  the  amount  of  capital  now  available  for  pro- 
ductive use  is  inadequate  to  employ  labor  at  its  maximum 
efficiency.  The  current  interest  theories  take  indeed  this 
ground.    Let  us  consider  the  subject  in  this  light. 

We  have  hitherto  applied  the  diagrams  Figs.  14  to  19  to 
some  single  commodity  or  trade.  But  for  our  present  pur- 
pose we  have  to  extend  their  application  to  the  entire  in- 
dustrial domain.  The  diagrams  are  accordingly  to  be  taken 
as  applying  not  to  a  single  line  of  production,  but  to  the  total 
of  all  productive  labor  of  the  community.  The  dimension  OC 
of  Fig.  16  then  represents  the  sum  total  of  available  capital, 
and  the  area  OC'e'E  the  yearly  output  of  the  entire  labor  force 
of  the  community. 

Suppose  that  an  additional  amount  C'z  of  capital  becomes 
available  and  is  offered  for  loan  to  whoever  offers  the  highest 
returns  for  it.  The  increase  of  the  output  that  may  be  gained 
by  its  use  through  an  increase  of  labor's  productivity  is  repre- 
sented by  the  area  C'zz'e',  and  the  possibility  of  this  increase 
naturally  elicits  a  certain  demand  for  its  use.  The  com- 
petitors for  the  supply  C'z  being  numberless  and  the  supply 
being  a  limited  quantity,  the  bids  for  its  use  will  tend  to  run 
up  to  the  full  amount  of  the  gain  it  affords.  The  successful 
bids  then  naturally  fix  the  rate  of  capital  profits  for  the 
market  generally  (243,  244).  The  rate  of  gain  due  to  the  last 
increment  of  capital  is  indicated  by  the  ordinate  .:z'  and  is 
termed  the  "final  efficiency  of  capital"  (242a)  when  Oz  is 
the  available  amount.  Hence,  if  the  amount  of  capital  is  in- 
deed limited,  its  final  efficiency  is  the  cardinal  factor  in  the 
determination  of  the  rate  of  capital  returns  (195). 

It  is  now  manifest  that  if  we  can  find  a  cause  for  such 
limitation  of  capital  wliich  prevents  the  employment  of  labor 
at  its  maximum  productivity,  we  will  know  all  that  is  neces- 
sary to  account  for  capital  interest  (242Z>).  And  capital  in- 
terest being  then  ascertainable,  the  share  of  labor  can  likewise 
be  ascertained,  for  that  share?  is  whatever  remains  of  the  net 
income  of  the  productive  groui)s. 
14 


CHAPTER  VIII 

LABOR  AND  WAGES 

163.  The  "  Wage  Fund  "  Theory.— From  the  time  of  the 
earliest  historic  records  on  the  subject  of  labor  and  wages  up 
to  the  time  of  the  inception  of  political  economy  as  a  branch 
of  academic  study  the  wages  of  the  unskilled  laborer  were 
seldom  more  than  enough  to  afford  a  bare  subsistence  for  him- 
self and  his  offspring.  Believing  this  condition  to  be  the 
natural  order  of  things,  the  earlier  exponents  of  the  science  en- 
deavored to  explain  it  on  the  basis  of  various  theories  derived 
from  their  observations.  By  the  beginning  of  the  nineteenth 
century  these  ideas  had  developed  into  the  general  conception 
of  what  has  since  been  denominated  as  the  ''wage  fund" 
theory,  which  was  generally  accepted  up  to  about  the  middle 
of  the  nineteenth  century,  but  has  since  been  abandoned  by 
almost  all  students  of  the  subject. 

The  wage  fund  theory  may  be  briefly  stated  as  follows : 

Wages  depend  upon  the  demand  and  supply  of  labor.  The 
supply  of  labor  depends  upon  the  number  of  laborers,  and  the 
demand  for  labor  is  established  and  measured  by  that  portion 
of  capital,  namely,  the  "wage  fund,"  which  is  available  for  the 
maintenance  of  labor  or,  what  amounts  to  the  same  thing,  for 
the  payment  of  wages.  The  division  of  this  fund  among  the 
laborer  fixes  wages,  which,  accordingly,  rise  whenever  the  wage 
fund  is  increased  or  the  number  of  laborers  reduced,  and  vice 
versa. 

When  wages  are  less  than  necessary  for  the  sustenance  and 
perpetuation  of  the  laboring  class,  those  insufficiently  nourished 
perish,  so  that  the  number  of  laborers  is  reduced,  and  wages 
rise.  Conversely,  if  Avages  are  higher,  the  propagation  of  the 
laboring  class  is  promoted,  the  number  of  laborers  increased, 
and  wages  are  thereupon  reduced.  Wages  therefore  constantly 
tend  to  the  bare  cost  of  subsistence.'^ 

»'  Cf.  Smith,  pp.  49  ff.;  Ricardo,  pp.  50  ff.;  Mill,  T,  pp.  420  if.;  et  ah 
210 


164]  LABOR  AND  WAGES  211 

When  this  pessimistic  theor}',  which  has  given  to  political 
economy  its  appellation  as  the  "Dismal  Science,"  is  closely 
examined,  it  is  found  that  it  leaves  out  of  consideration  a 
factor  without  which  its  conclusions  remain  indefinite.  Sup- 
posing the  wage  fund  and  the  number  of  laborers  as  given, 
there  is  nothing  to  indicate  whether  the  result  of  the  division 
represents  the  wages  of  a  week,  or  of  a  month,  or  of  any 
other  definite  period  of  time. 

Any  postulated  wage  fund  must  soon  be  exhausted  unless 
replenished.  It  follows  that  wages  are  determined,  not  by  its 
absolute  amount,  as  predicated  by  those  writers,  but  by  the 
rate  at  which  its  restoration  proceeds.  As  this  fund  can  be 
replenished  only  by  labor,  an  increase  of  the  number  of 
laborers  will  increase  not  only  the  amount  of  wages  constant!}^ 
to  be  dra\\'n  from  it,  but  also  the  amount  of  things  constantly 
restored  to  it;  hence  an  increase  of  the  number  of  laborers 
cannot  result  in  a  reduction  of  wages.  The  wage  problem 
hinges  on  the  question :  what  portion  of  the  value  produced 
by  labor  accrues  to  the  wage  fund?  And  this  brings  us  back 
to  the  question  regarding  the  division  of  the  total  product 
betM'een  labor  and  capital. 

164.  The  Wage  Theory  of  Socialism. — Karl  Marx,  in  his 
notable  work  "Das  Kapital,'*  publi.shed  in  1867,  offers  another 
demonstration  of  the  proposition  that  wages  tend  to  the  bare 
cost  of  maintenance  (366),  a  condition  which  Lasalle  had 
characterized  as  the  "Iron  Law  of  Wages"  {Das  Eherne 
Lohngcsetz).  This  demonstration  is  founded  on  the  general 
proposition  that  the  value  of  a  commodity  is  determined  by 
the  labor  "socially  necessary"  for  its  production  (63,  149), 
and  from  this  predicate  is  derived  the  conclusion  that  the 
value  of  labor  power,  viewed  as  a  commodity,  depends  upon 
the  amount  of  labor  necessary  to  maintain  that  power. 

The  following  quotations  give  the  gist  of  the  value  theory 
propounded  l)y  Marx: 

A  useful  article  has  value  only  because  human  labour  in  the  ab- 
stract has  been  embodied  or  materialized  in  it.  IIow,  then,  is  the 
maf,'nitude  of  this  value  to  be  measured?  Plainly  by  the  quantity  of 
the  value-creatinrf  substance,  the   labour,  ronliiiiicil   in   the  article.    The 


212  DISTRIBUTION  OF  WEALTH  [164 

quantity  ot  labour,  however,  is  measured  by  its  duration,  and  labour 
time  in  its  turn  finds  its  standard  in  weeks,  days  and  hours." 

Recognizing  the  manifest  difference  between  the  skilled  and 
the  unskilled,  he  explains  that — 

The  labour  that  forms  the  substance  of  value,  is  homogeneous 
human  labour,  expenditure  of  one  uniform  labour-power.  The  total 
labour  power  of  society,  which  is  embodied  in  the  sum  total  of  the 
value  of  all  commodities  produced  by  that  society,  counts  here  as  one 
homogeneous  mass  of  human  labour-power,  composed  though  it  be  of 
innumerable  individual  units.  Each  of  those  units  is  the  same  as  any 
other,  so  far  as  it  has  the  character  of  the  average  labour-power  of 
society,  and  takes  effect  as  such;  that  is,  so  far  as  it  requires  for 
producing  a  commodity,  no  more  time  than  is  needed  on  an  average,  no 
more  than  is  socially  necessary.^' 

Skilled  labour  counts  only  as  simple  labour  intensified,  or  rather, 
as  multiplied  simple  labour,  a  given  quantity  of  skilled  being  con- 
sidered equal  to  a  greater  quantity  of  simple  labour.  Experience  shows 
that  this  reduction  is  constantly  being  made.  A  commodity  may  be 
the  product  of  the  most  skilled  labour,  but  its  value,  by  equating  it 
to  the  product  of  simple  unskilled  labour,  represents  a  definite  quantity 
of  the  latter  labour  alone.  .  .  .  For  simplicity's  sake  we  shall 
henceforth  account  every  kind  of  labour  to  be  unskilled,  simple  labour; 
by  this  we  can  do  no  more  than  save  ourselves  the  trouble  of  making 
the  reduction." 

This  proposition  is  defective  inasmuch  as  labor  cannot 
serve  as  a  measure  of  value  (30).  The  time  of  labor  cannot 
be  used  to  measure  the  value  of  labor's  products,  because  of 
the  vast  difference  of  quality  and  quantity  of  the  product  of 
different  men's  labor  in  any  given  time.  Marx  seeks  to  deal 
with  these  discrepancies  by  expressing  the  quantity  of  all 
kinds  of  labor  in  terms  of  the  time  of  simple  labor,  and  falls 
back  on  experience  to  obtain  the  rate  of  this  reduction.  He 
seems  not  to  have  realized  that  in  this  he  was  ignoring  instead 
of  solving  the  problem  before  him.  Compare,  for  example, 
the  work  of  a  berry-picker  with  that  of  a  watchmaker.  Sup- 
pose a  watch  made  in  fifty  hours  is  worth  forty  dollars,  while 
a  quart  of  berries  picked  in  half  an  hour  has  a  value  of  ten 
cents.    Mai^x  would  explain  this  as  follows:  The  berry-picker's 

"'  Marx,  p.  45  ( 13 ) .    Numbers  in  parentheses  refer  to  German  edition. 
^^Ibid.,  pp.  45-46    (13-14).  ^*Ibid.,  pp.  51-52    (19-20). 


164]  LABOR  AND  WAGES  213 

is  simple,  unskilled  labor,  hence  the  value  of  his  product  is 
measured  directly  by  the  hours  spent  in  the  picking.  The 
watchmaker 's,  on  the  other  hand,  is  skilled  labor,  and  his  time 
must  be  multiplied  by  four,  a  factor  found  by  experience.  But 
unfortunately  for  Marx 's  reasoning,  this  ' '  experience ' '  implies 
a  knowledge  of  the  actual  market  value  of  the  products  of 
the  different  workers.  The  value  of  the  watch  is  forty  dollars, 
and  that  of  a  quart  of  berries  is  ten  cents,  while  the  time  spent 
is  fifty  hours  and  one-half  of  an  hour  respectively.  The  watch 
is  worth  four  hundred  times  as  much  as  a  quart  of  berries 
and  requires  but  one  hundred  times  the  number  of  hours  of 
labor.  It  is  because  the  watchmaker  produces  four  times  as 
much  value  per  hour  as  the  berry-picker  that  in  practice  his 
time  of  labor  is  worth  four  times  as  much  as  the  berry-picker's. 
If  the  value  of  the  watch  and  that  of  the  berries  were  not 
known  from  experience,  Marx's  theory  could  not  explain  why 
the  watchmaker's  time  should  be  multiplied  by  four  or  any 
other  factor.  By  turning  to  experience  to  obtain  the  factor 
of  his  "reduction,"  he  virtually  assumes  the  value  of  the 
sundry  products  of  labor  as  known,  in  order  to  find  how  to 
''reduce"  the  time  of  skilled  work  to  hours  of  simple  labor. 
Marx's  theory  can  be  applied  for  finding  the  value  of  a  thing 
only  on  condition  that  this  value  is  already  known,  a  clear  case 
of  arguing  in  a  circle. 

The  wage  problem  is  treated  by  Marx  as  a  special  case  of 
the  law  of  value.  Under  the  reign  of  capitalistic  production, 
he  says,  the  workman  has  no  choice  but  to  sell  his  ''labour 
power,"  and  then  he  reasons  as  follows  (207fl)  : 

The  value  of  labour-power  is  determined,  an  in  the  ease  of  every 
other  commodity,  by  tlie  labour-time  necessary  for  the  production,  and 
consequently  also  the  reproduction,  of  this  special  article.  So  far  aa 
it  lias  value,  it  represents  no  more  than  a  definite  quantity  of  the 
average  lai)Our  of  society  incorporated  in  it.  Labour-power  exists  only 
as  a  capacity,  or  power  of  the  living  individual.  Its  production  con- 
sequently presupposes  his  existence.  Given  the  individual,  the  pro- 
duction of  labour-power  consists  in  his  reproduction  of  himself  or  his 
maintenance.  For  his  maintenance  he  requires  a  given  quantity  of  the 
means  of  subsistence.  Therefore  the  labour-time  requisite  for  the  pro- 
duction of   labour-power   reduces   itself   to  that   necessary   for   the   pro- 


214  DISTRIBUTION  OF  WEALTH  [i64 

duction  of  those  means  of  subsistence;  in  other  words,  the  value  of 
the  labour-power  is  the  value  of  the  means  of  subsistence  necessary  for 
the  maintenance  of  the  labourer." 

This  proposition  is  just  as  illogical  as  his  value  theory.  It 
certainly  fails  to  explain  why  the  watchmaker's  wages  should 
be  four  times  the  berry-picker's,  the  value  of  the  means  of 
subsistence  necessary  for  the  maintenance  of  both  being  prac- 
tically the  same.  Moreover,  labor  power  can  be  treated  as  a 
commodity  only  if  the  laborer  himself  is  a  commodity,  that  is, 
a  slave.  The  benefits  derived  from  any  natural  force,  like 
steam,  or  a  horse,  need  cost  no  more  than  the  production  and 
utilization  of  the  steam  or  of  the  maintenance  of  the  horse. 
This  applies  also  to  slave  labor,  and  for  such  Marx's  wage 
theory  is  correct  in  every  particular. 

But  the  time  of  chattel  slavery  is  past.  Unlike  the  horse 
or  the  slave,  the  workman  of  to-day  is  free  to  select  his  occupa- 
tion and  to  choose  between  working  by  himself  or  in  co-opera- 
tion with  others.  He  can  leave  his  employer  if  another  offers 
him  higher  wages  or  better  treatment.  When  employers  com- 
pete for  labor's  services,  it  is  the  workmen,  not  the  masters, 
who  get  the  benefit.  It  is  only  when  there  is  not  enough  work 
to  keep  all  workers  employed  that  the  competition  among 
them  for  employment  predominates  and  depresses  wages.  The 
workman  is  a  free  agent,  except  in  such  respects  as  he  is 
bound  in  common  with  all  other  members  of  the  community. 
Socialists  may  insist  on  calling  him  a  wage  slave,  but  not  even 
to  serve  their  theory  can  the  wage  earner  be  regarded  as  a 
chattel  slave,  to  whom  alone,  as  we  have  noted,  Marx's  theory 
applies.  It  is  beyond  reason  to  insist  that  the  workmen's 
freedom  can  make  no  difference  in  their  wages  as  compared 
with  what  they  would  obtain  were  they  slaves.  Under  con- 
ditions of  freedom  a  workman's  wages  are  virtually  the  pro- 
ceeds of  an  actual  sale  of  the  fruit  of  his  labor.  A  skilful,  an 
industrious  workman  obtains  higher  wages  than  one  who  is 
inexperienced  or  indolent,  even  though  the  cost  of  living  be 
equal  for  both.     The  purchaser  of  slaves  may  reflect  on  the 

"Marx,  pp.  189-190  (155-156). 


1651  LABOR  AND  WAGES  215 

cost  of  feeding  and  housing  before  buying  them,  but  the 
emploja^r,  as  a  purchaser  of  the  results  of  labor,  does  not 
inquire  what  a  man  needs  for  his  living ;  he  pays  according  to 
what  a  man  can  do  and  how  productive  his  services  are.  Wages 
are  determined  by  factors  fundamentally  different  from  those 
which  determine  the  cost  of  maintaining  a  horse  or  a  slave. 
The  socialistic  wage  theory  is  clearly  untenable  (207&). 

165.  Three  Forms  of  Wages. — The  raw  products  of  nature 
are  moulded  by  human  effort  into  form  for  human  needs. 
Nature  furnishes  at  once  the  material  and  the  forces,  and 
human  effort,  directed  by  human  intelligence,  is  the  agency 
by  which  these  forces  are  directed  and  applied. 

In  general,  the  products  of  nature  can  be  made  available 
for  human  needs  only  by  the  application  of  labor,  and  the 
utilities  so  won  are  the  natural  recompense  of  labor.  This 
has  been  stated  by  Adam  Smith  as  follows: 

The  produce  of  labour  constitutes  the  natural  recompense  or  wages 
of  labour." 

But  wages  can  be  considered  in  two  other  ways.  As 
ordinarily  understood,  the  term  denotes  "money  wages,"  that 
is  to  say,  the  money  paid  to  the  worker  in  exchange  for  his 
share  of  the  effort  spent  in  obtaining  the  product ;  and  finally, 
the  things  or  services  bought  by  the  worker  with  the  money 
wages  are  regarded  by  some  authorities  as  the  "real  wages" 
(284).  Thus  we  have  three  different  forms  of  wages,  the  first 
being  the  direct  product  of  labor,  the  second  the  money  ob- 
tained in  exchange  for  that  product,  and  the  third  the  things 
or  services  obtained  for  the  money. 

Where  industry  is  speciali/.ed,  the  workman  seldom  desires 
a  portion  of  the  particular  things  which  he  helps  to  make,  but 
rather  his  share  of  their  value.  For  this  reason  we  are  not  so 
much  concerned  with  the  first  form  of  wages  as  with  the 
second.  Wages,  in  this  sense,  is  what  the  worker  obtains  as 
his  share  of  the  proceeds  from  the  sale  of  the  product  of  the 
producing  group.     We  are  thus  again  brought  face  to  face 

"".Smitli,  p.  40. 


216  DISTRIBUTION  OF  WEALTH  [lee,  i67 

with  the  question  as  to  what  portion  of  the  proceeds  becomes 
allotted  as  wages,  and  how  that  allotment  is  shared  out  among 
the  individual  workers  of  the  group. 

1 66.  Wages  Apportioned  Through  Competition. — Appar- 
ently the  wages  of  employed  workers  are  determined  by  the 
employer.  But  in  reality  they  are  the  price  of  the  workers' 
product  and  are  therefore  subject  to  the  conditions  of  the 
market.  The  employer,  in  paying  wages,  really  buys  the 
product  of  the  workers  and  therefore  pays  to  each  the  market 
equivalent  of  the  service  received  from  him.  Whether  a 
workman  is  skilled  or  unskilled,  his  recompense  is  determined 
by  supply  and  demand  as  applied  to  the  particular  service 
he  renders.  When  an  employer  pays  wages  below  the  market 
value  of  the  services  rendered,  the  wage  earners  seek,  and 
ultimately  obtain,  more  remunerative  employment  elsewhere. 
If,  on  the  other  hand,  he  pays  wages  above  the  market  value 
of  the  services  obtained,  he  ultimately  exhausts  his  resources 
and  is  compelled  to  reduce  wages  or  give  up  his  business.  So 
long  as  both  workmen  and  employers  are  free  to  accept  or 
reject  each  others'  terms,  the  force  of  competition  regulates 
the  distribution  of  the  workers'  share  EF  (Fig.  13)  in  accord- 
ance with  services  rendered.  The  freedom  of  change  from 
one  employer  to  another  and  of  migration  from  one  pursuit 
to  another  brings  about  among  the  workers  in  any  productive 
group  a  practically  just  distribution  of  that  part  of  the  in- 
come which  existing  conditions  allot  to  labor. 

The  psychological  element  which  enters  into  the  problem, 
namely  the  disinclination  of  both  workmen  and  employers  to 
change  an  existing  situation,  can  only  retard,  but  cannot  pre- 
vent an  ultimate  adjustment, 

167.  Employers'  Wages. — ^We  have  seen  that  the  employer 
represents  two  independent  functions.  He  is  both  manager  and 
venturer  (146),  His  income  as  employer  consists,  accordingly, 
of  two  items,  namely  manager's  wages  and  chance  profits.  At 
this  stage  of  our  discussion  we  are  dealing  only  with  the 
question  of  wages  and  must  ignore  those  factors  of  the  case 
which  account  for  chance  profits. 

The  employer  does  not,  like  the  employe,  receive  stated 


167]  LABOR  AND  WAGES  217 

wages  or  salarj^  His  recompense  is  a  residual  share  (205). 
The  gross  receipts  from  the  sale  of  the  products  of  his  group 
are  distributed  by  him.  On  the  one  hand  he  pays  for  all 
services  contributed  by  other  groups,  and  on  the  other  hand 
he  pays  the  Avages  of  his  employes,  the  rent  for  the  land  occu- 
pied, the  charges  for  the  use  of  the  capital  goods  and  the 
interest  on  money  borrowed.  The  remainder  constitutes  his 
income,  the  "wages"  of  his  labor.  Of  course,  if  he  happens 
to  be  the  owner  of  the  capital  employed,  we  must  here  assume 
that  he  is  paying  the  corresponding  charges  to  himself  as 
capitalist  or  land  owner. 

The  diagram  Fig.  13  illustrates  this  distribution.  The 
expenses  of  the  employer  consist  of  the  anterior  charges  AB, 
the  profits  BE  due  to  the  invested  capital  and  the  wages  EF  of 
the  employes,  the  remainder  FG  being  his  wages. 

When  the  market  rate  of  wages  is  such  that  the  share  left 
to  employers  is  more  than  their  efforts  are  really  worth,  that 
is,  when  the  income  of  employers  is  out  of  proportion  to  their 
services,  some  of  the  employed  are  induced  to  go  into  business 
for  themselves,  thereby  becoming  employers.  Consequently 
the  demand  for  wage  workers  is  increased,  while  the  supply 
is  reduced,  causing  wages  to  rise  and  the  share  of  the  em- 
ployers, as  a  whole,  to  fall  until  a  proper  adjustment  is  at- 
tained. And  vice  versa,  when  wages  rule  so  high  that  the 
employers'  share  is  below  a  proper  recompense,  some  of  them 
find  that  they  can  earn  more  by  taking  employment  and  do  so. 
The  number  of  employers  is  thereby  reduced  and  the  ruling 
rate  of  wages  for  employes  falls  because  of  the  reduced  de- 
mand, leaving  for  the  remaining  employers  a  greater  share. 
The  division  of  labor's  portion  EG  into  the  shares  EF  and 
FG,  the  one  going  to  employes,  the  other  being  left  for  the 
employer,  is  in  this  way  adjusted  to  a  point  where  the  tendency 
of  employes  to  become  employers  and  that  of  employers  to 
become  employes  are  evenly  balanced. 

It  is  thus  clear  that  an  employer's  wages,  even  though 
they  accrue  to  him  as  a  residual  share,  depending  on  various 
circumstances,  are  yet  subject,  in  the  last  analysis,  to  the  law 
of  supply  and  demand. 


218  DISTRIBUTION  OF  WEALTH  [167 

There  is,  in  the  nature  of  things,  a  difference  in  the 
capability  of  different  employers.  Some  have  a  high  order  of 
executive  ability  and  can  successfully  direct  the  forces  of  a 
large  organization,  while  others  reach  the  limit  of  their  direc- 
tive capacity  in  a  concern  employing  but  a  small  number  of 
men.  In  all  cases  the  efficiency  of  the  workers  is,  to  a  large 
extent,  dependent  on  the  efficiency  of  the  direction.  Hence  a 
difference  in  directive  ability  accounts  for  a  far  greater  differ- 
ence in  the  net  income  of  different  groups  than  a  like  difference 
in  the  ability  of  other  individual  workers.  The  wages  of 
employes  being  the  same  whatever  the  ability  of  the  employer, 
every  difference  in  the  net  income  due  to  difference  in  manage- 
ment will  appear  in  the  employer 's  residual  share,  and  a  small 
percentage  of  increase  in  the  efficiency  of  a  group  will  increase 
the  employer's  share  by  a  large  percentage.  This  accounts  for 
the  well  knowTi  fact  that  the  share  of  the  employer  rises  or  falls 
more  rapidly  according  to  his  ability  than  that  of  any  other 
of  the  workers. 

As  in  every  other  calling,  we  find  among  employers  of 
labor  many  who  obtain  more  than  their  price  limit,  that  is, 
what  they  could  earn  as  employes.  From  the  highest  mark 
the  various  employers'  incomes  grade  down  toward  the  mar- 
gin, where  their  share  is  no  greater  than  what  they  could  earn 
as  employes.  It  follows  that  in  this  relation  of  the  employer 
to  the  employed  the  margin  is  determined  by  the  supply  of 
and  the  demand  for  employers'  services,  just  as  the  margin 
in  other  lines  is  determined  by  supply  and  demand ;  and  for 
the  same  reason  that  the  incomes  of  intra-marginal  employers 
rise  rapidly,  those  of  extra-marginal  employers  fall  as  rapidly. 
If  those  whose  business  ability  is  inferior  to  that  of  the 
marginal  manager  enter  the  field  as  employers,  even  under 
favorable  auspices,  they  sooner  or  later  fail  in  their  venture. 
That  the  alluring  prospects  attract  many  is  evidenced  by  the 
fact  that  a  large  proportion  of  those  who  start  in  business 
find  it  impossible  to  make  a  success  of  it.  And  among  those 
who  do  not  fail,  there  are  many  who  remain  at  or  near  the 
margin,  their  incomes  as  employers  being  no  more,  and  per- 


168]  LABOR  AND  WAGES  219 

haps  even  less,  than  what  they  would  get  if  they  were  to 
become  wage  camel's. 

1 68.  Merchants'  Wages. — A  merchant's  income  is  really 
that  01  an  employer,  for  he  is  manager  of  a  group  that  for- 
wards goods  toward  maturity.  In  the  modem  system  of  pro- 
duction it  is  necessary  that  the  products  of  industry  be 
brought  within  convenient  reach  of  the  consumers,  and  to  do 
this  is  the  office  of  the  merchant. 

The  gross  income  of  his  business,  like  that  of  any  other 
group,  is  divided  into  anterior  charges  and  net  income,  and 
the  latter  is  sub-divided  into  profits  and  wages,  the  profits 
going  to  the  invested  capital  and  the  wages  to  the  active  par- 
ticipants, including  himself.  From  his  standpoint  as  business 
manager  the  anterior  charges  AB,  Fig.  13,  paid  to  other 
groups,  the  profits  BE  accruing  to  the  invested  capital  and 
the  wages  EF  paid  to  clerks,  salesmen  and  other  employes, 
are  expenditures,  the  remainder  PG  being  his  own  wages.  Our 
conclusions  regarding  wages  of  organizers  and  employers  are 
in  every  particular  applicable  to  those  of  the  merchant. 

The  difference  between  wholesale  and  retail  price,  which 
is  frequently  termed  "profits,"  is  wages,  at  least  in  part 
(140) .  Some  writers  on  economics  have  decried  these  "profits" 
of  the  middlemen,  but  these  deprecations  are  largely  due  to  a 
misconception.  The  dealer  performs  one  of  the  necessary 
functions  in  the  system  of  modem  production.  So  long  as  he 
is  not  the  possessor  of  an  exclusive  right,  so  long  as  others  are 
free  to  compete  with  him  on  equal  terms,  his  income  can  only 
amount  to  the  value  of  the  services  he  renders.  There  is,  in 
fact,  no  such  thing  as  a  "business  profit"  apart  from  the 
forms  of  income  previously  tabulated  (138).  In  this  list 
every  elementary  form  of  income  is  enumerated,  and  "busi- 
ness profit,"  which  is  an  aggregate  of  various  elementary 
incomes,  has  no  place  in  it. 

An  independent  item  of  income  is  sometimes  accredited  to 
what  is  known  as  the  "good-will"  of  a  business,  but  even  the 
income  from  this  source  can  be  resolved  into  the  clemi^ntary 
forms  of  our  list.  The  conditions  known  as  "good-will"  re- 
sidt  from  past  endeavor  and  the  reputation  earned  through  it. 


220  DISTRIBUTION  OF  WEALTH  [169 

Good-will  therefore  represents  past  effort  and  expenditure, 
and  its  proceeds  are  to  be  classed  as  wages  and  returns  from 
capital. 

169.  Adjustment  of  Wages. — In  view  of  the  conclusions 
we  have  reached,  we  may  now  more  emphatically  than  before 
repeat  that  under  conditions  of  free  competition  the  wages 
portion  of  the  net  income  of  a  group  is  in  the  main  shared 
equitably  among  all  the  active  participants,  including  the 
employer.  There  is  no  room  for  the  supposition  that  the  em- 
ployer, or  any  other  worker,  obtains  in  the  long  run  more  or 
less  than  his  just  share.  From  the  foregoing  it  necessarily 
follows  that,  contrary  to  a  widely  prevalent  belief,  the  em- 
ployer's ser\'ices  are  not  overpaid  at  the  expense  of  the  em- 
ployed, and  that  the  wages  system  has  no  inherent  tendency 
toward  inequity.  But  we  have  yet  to  analyze  how  the  net  in- 
come of  a  group  is  divided  into  wages  and  capital  profits, 
and  when  we  fully  understand  the  causes  which  regulate  this 
division,  we  shall  see  that  it  is  the  capitalist  and  not  the 
employer  who  gets  more  than  an  equitable  share. 


CHAPTER  IX 

LAND  AND  RENT 

170.  Land  the  Prime  Source  of  Wealth. — The  primary- 
source  of  all  wealth  is  nature  itself.  The  materials  which  are 
turned  into  commodities  by  the  various  processes  of  production 
are  products  of  nature.  The  forces  which  become  the  servants 
of  man  as  he  utilizes  them  in  these  processes  are  forces  of 
nature. 

Just  as  all  kinds  of  productive  efforts  are  included  in  the 
comprehensive  teraa  ' '  labor, ' '  so  are  all  natural  sources  of  the 
materials  and  of  the  forces  requisite  to  production  included 
in  the  term  "land."  This  term,  in  the  economic  sense,  there- 
fore embraces  much  more  than  what  is  ordinarily  understood 
by  it.  It  embraces  not  only  arable  soil,  building  sites  and 
forests,  but  also  mines,  waterfalls,  fishing  grounds  and  the 
like. 

In  order  to  obtain  raw  materials  from  land,  it  is  generally 
necessary  to  perform  more  or  less  preparatory  labor.  Before 
wheat  can  be  reaped,  the  land  must  be  plowed  and  fertilized 
and  the  seed  sown.  Provision  must  be  made  to  store  the  grain 
for  protection  against  rain  and  storm.  Coal  is  obtained  prin- 
cipally by  first  sinking  shafts  and  installing  mining  machinery. 
Inasmuch  as  most  of  the  results  of  this  work  are  inseparable 
from  the  land,  those  who  perform  the  work  and  those  who 
furnish  the  necessary  appliances  can  be  protected  in  the 
ownership  of  those  results  only  by  a  concession  of  the  ex- 
clusive right  to  the  occupancy  of  the  land.  For  this  reason 
land  has  become  private  property. 

171.  Land  Distinguished  from  Improvements  Thereon. 
— Land,  a.s  a  factor  of  production,  presents  a  feature  which  is 
possessed  by  no  other  form  of  capital.  The  labor  required  for 
the  production  of  like  things  in  different  localities  is  not  equal, 
but  depends  upon  location  and  fertility  of  the  land.  Where 
these  characteristics  arc  favorable,  the  same  results  can  be  ob- 

221 


222  DISTRIBUTION  OF  WEALTH  [172 

tained  easier  than  elsewhere.  It  is  for  this  reason  that  the 
value  of  products,  according  as  they  are  obtained  from  one  or 
another  piece  of  land,  may  exceed,  or  be  equal  to,  or  even  fall 
below  the  nonnal  charges  for  the  efforts  exerted  and  the 
capital  goods  employed  in  production.  Of  course,  where  it 
is  found  that  the  value  of  the  products  is  in  the  average  less 
than  the  cost  of  their  production,  this  land  will  no  longer  be 
used  for  that  particular  purpose.  But  where  the  products 
obtained  have  a  value  exceeding  this  cost,  the  excess  con- 
stitutes a  profit  to  which  the  term  "rent,"  in  the  sense  of 
"economic  rent"  as  distinguished  from  "gross  rent,"  has 
been  applied  (139). 

If  land  which  yields  such  profit,  or  rent,  is  offered  for 
lease,  competition  obliges  the  lessor  to  pay  for  its  use  a  charge 
practically  equal  to  this  rent  (323).  And  if  it  is  offered  for 
sale,  competition  for  its  ownership  raises  its  value  to  a  point 
proportionate  to  the  profit  yielded.  It  is  the  profit-yielding 
feature  of  land  that  gives  it  a  market  value. 

In  studying  the  nature  of  land  values,  the  value  of  the 
preparations  for  its  use,  that  is  to  say,  the  "improvements" 
made  upon  the  land,  must  be  considered  separately  from  that 
of  the  land  itself.  The  value  of  real  estate  is  therefore  made 
up  of  two  items,  namely,  that  of  the  land  and  that  of  the 
improvements.  AVe  are  at  this  point  concerned  only  with  rent 
and  with  the  value  of  land  apart  from  that  of  improvements 
(173).  The  latter  are  to  be  considered  as  capital  goods,  the 
economic  status  of  which  will  be  discussed  in  the  next  chapter. 

In  some  instances  improvements  become  so  incorporated  in 
the  land  that  the  distinction  we  have  here  in  view  partly  or 
Avholly  disappears.  This  is  the  case  in  clearing  land  of  rocks, 
or  reclaiming  it  from  swamps,  and  so  forth.  We  shall  revert 
to  this  feature  of  the  subject  when  the  taxation  of  the  land  is 
to  be  considered  (331). 

172.  Ricardo's  Law  of  Rent. — As  regards  the  causes  that 
bring  about  and  regulate  rent,  there  is  practically  no  differ- 
ence of  opinion  among  modem  economists.  All  agree  upon 
the  main  points  of  the  proposition  known  as  "Ricardo's  Law 


172]  LAND  AND  RENT  223 

of  Rent"'  (130).  Since  its  promulgation,  in  the  early  part 
of  the  nineteenth  century,  only  a  few  unavailing  attempts 
have  been  made  to  discredit  it,  and  these  have  resulted  merely 
in  confirming  its  truth.  Such  divergence  of  opinion  as  still 
remains  relates  only  to  minor  details. 

The  nature  of  rent  and  the  law  that  regulates  it  were 
recognized,  in  a  measure,  by  some  writers  before  the  close  of 
the  eighteenth  centuiy,  but  since  Rieardo  was  the  first  to 
propound  the  law  in  a  well  defined  and  comprehensive  form, 
it  is  now  distinguished  by  his  name.  A  brief  excerpt  of  his 
presentation  is  here  quoted : 

On  the  tirst  settling  of  a  country,  in  which  there  is  an  abundance 
of  rich  and  fertile  land,  a  very  small  portion  of  which  is  required  to  be 
cultivated  for  the  support  of  the  actual  population,  .  .  .  there  will 
be  no  rent;  for  no  one  would  pay  for  the  use  of  land  when  there  is  an 
abundant  quantity  not  yet  appropriated,  and,  therefore,  at  the  dis- 
posal of  whosoever  might  choose  to  cultivate  it. 

,  .  .  If  all  land  had  the  same  properties,  if  it  were  unlimited 
in  quantity,  and  uniform  in  quality,  no  charge  could  be  made  for  its 
use,  unless  where  it  possessed  peculiar  advantages  of  situation.  It 
is  only,  then,  because  land  is  not  unlimited  in  quantity  and  uniform  in 
quality,  and  because,  in  the  progress  of  population,  land  of  an  inferior 
quality,  or  leas  advantageously  situated,  is  called  into  cultivation,  that 
rent  is  ever  paid  for  the  use  of  it.  When,  in  the  progress  of  society, 
land  of  the  second  degree  of  fertility  is  taken  into  cultivation,  rent 
immediately  commences  on  that  of  the  first  quality,  and  the  amount  of 
that  rent  will  depend  on  the  ditterence  in  quality  of  these  two  portions 
of  land. 

When  land  of  the  third  quality  is  taken  into  cultivation,  rent  im- 
mediately commences  on  the  second,  and  it  is  regulated  as  before,  by 
the  ditterence  of  their  productive  powers.  At  the  same  time,  the  rent 
of  the  first  quality  will  rise,  for  that  must  always  be  above  the  rent 
of  the  second,  by  the  ditference  between  the  produce  which  they  yield 
with  a  given  quantity  of  capital  and  labour.  With  every  step  in  the 
progress  of  population,  which  shall  oblige  a  country  to  have  recourse 
to  land  of  a  worse  quality,  to  enable  it  to  raise  its  supply  of  food,  rent 
on  all  the  more  fertile  land,  will  rise. 

Thus  suppose  land — Nos.  1,  2,  3 — to  yield,  with  an  ('(jual  employ- 
ment of  capital  and  labour,  a  net  produce  of  100,  90,  and  80  quarters 
of  corn.  In  a  new  country,  where  there  is  an  abundance  of  fertile  land 
compared  with  the  population,  and  where  therefore  it  is  only  neces- 
sary to  cultivate  No.  1,  the  whole  net  produce  will  belong  to  the  cul- 
tivator, and  will  be  the  ))roftt8  of  the  stock  which  he  advances.    As  soon 


224  DISTRIBUTION  OF  WEALTH  [173 

as  population  had  so  far  increased  as  to  make  it  necessary  to  cultivate 
No.  2,  from  which  90  quarters  only  can  be  obtained  after  supporting 
the  labourers,  rent  would  commence  on  No.  1,  ...  In  the  same 
manner  it  might  be  shown  that  when  No.  3  is  brought  into  cultivation, 
the  rent  of  No.  2  must  be  ten  quarters,  or  the  value  of  ten  quarters, 
while  the  rent  of  No.  1  would  rise  to  20  quarters;  for  the  cultivator  of 
No.  3  would  have  the  same  profits  whether  he  paid  twenty  quarters  for 
the  rent  of  No.  1,  ten  quarters  for  the  rent  of  No.  2,  or  cultivated 
No.  3  free  of  all  rent." 

In  following  up  his  argument,  Ricardo  proceeds : 

The  reason,  then,  why  raw  produce  rises  in  comparative  value,  is 
because  more  labour  is  employed  in  the  production  of  the  last  portion 
obtained,  and  not  because  a  rent  is  paid  to  the  landlord.  The  value  of 
corn  is  regulated  bj'  the  quantity  of  labour  bestowed  on  its  production 
on  that  quality  of  land,  or  with  that  portion  of  capital,  which  pays  no 
rent.  Corn  is  not  high  because  rent  is  paid,  but  a  rent  is  paid  because 
corn  is  high  (359)  ;  and  it  has  been  justly  observed,  that  no  reduction 
would  take  place  in  the  price  of  corn,  although  landlords  should  forego 
the  whole  of  their  rent.  Such  a  measure  would  only  enable  some 
farmers  to  live  like  gentlemen,  but  would  not  diminish  the  quantity  of 
labour  necessary  to  raise  the  raw  produce  on  the  least  productive  land 
in  cultivation.'^* 

173.  Graphical  Representation  of  Ricardo's  Law. — In  the 
proposition  so  clearly  stated  by  Ricardo  the  reader  will  readily 
recognize  the  principle  which  underlies  the  theory  of  value 
discussed  in  a  preceding  chapter  (56-61).  Ricardo  has  really 
paved  the  way  for  a  clear  understanding  of  the  actions  and 
reactions  by  which  market  values  are  regulated.  He  recog- 
nized the  principle  of  the  varying  cost  of  production  which 
forms  the  basis  of  what  we  called  the  "sellers'  price  limit" 
and  represented  by  a  rising  curve.  Later  writers  recognized 
a  similar  variation  in  regard  to  the  desire  for  any  given 
product  and  supplied  the  final  link  necessary  to  formulate  the 
law  of  value. 

If  the  item  of  rent  is  left  out  in  figuring  the  cost  of  pro- 
duction (61),  this  cost  becomes  a  varying  quantity  that  can 
be  represented  by  a  rising  curve,  and  the  graphic  method  for 
illustrating  the  interaction  of  supply  and  demand  can  then  be 
used  advantageously  to  illustrate  the  law  of  rent. 


"'  Ricardo,  pp.  35-3G.  °*  Ibid.,  pp.  38-39. 


173]  LAND  AND  RENT  225 

The  owner  of  a  piece  of  land  will  not  put  it  to  use  unless 
the  market  price  of  his  products  at  least  covers  the  three  items : 
cost  of  supplies,  current  charges  for  the  capital  goods  em- 
ployed and  value  of  his  labor  and  that  of  those  whom  he  may 
employ.  This  sum,  then,  is  "cost  of  production"  from  the 
standpoint  of  the  landowner  and  becomes  his  price  limit  as  a 
seller  of  his  products.  This  price  limit  is  different  for  the 
owners  of  different  pieces  of  land,  for  the  cast  of  production 
in  each  case  is  affected  by  the  varying  fertility  and  location 
of  the  land. 

Now  let  us  suppose  that  the  curve  SS'  of  Fig.  20  repre- 
sents the  possible  supply  of  a  certain  product  that  can  be 
furnished  to  a  given  market,  the  elements  of  this  supply  being 
ordered  in  rising  series  of  their  respective  cost  or  "price 
limit,"  and  let  us  further  assume  that  the  curve  DD'  repre- 
sents the  demand  for  this  same  product.  The  intersection  of 
these  two  curves  will  then  locate  the  marginal  point  a.  Accord- 
ingly, the  i-uling  price  of  the  entire  supply  of  the  market  will 
adjust  itself  to  the  rate  Op,  no  matter  what  difference  there 
may  be  in  the  cost  of  producing  the  separate  elements,  and 
only  those  elements  of  the  possible  supply  as  are  at  and  inside 
of  the  margin  a  will  be  continuously  produced  and  actually 
supplied  in  the  market. 

Concentrating  our  attention  on  the  element  q',  it  can  be 
seen  that  the  proceeds  q'r'  from  its  sale  are  divided  into  two 
parts,  q's'  and  s'r',  of  which  the  first  consists  of  cost  of  supplies, 
returns  of  capital  goods  and  wages  of  labor,  while  the  second 
constitutes  the  "rent"  afforded  by  the  land  from  which  the 
element  q'  is  obtained  (323).  This  profit  is  primarily  ac- 
quired by  the  user  or  cultivator  of  the  land  when  he  sells  his 
products  in  the  market,  but  if  tenant,  he  pays  it  over  to  the 
landlord  for  the  use  of  the  land. 

Land  rented  to  a  tenant  usually  carries  improvements.  If 
so,  the  landlord  really  supplies  at  lea.st  a  portion  of  the  capital 
goods  used  by  the  tenant  in  his  woi-k  (171).  Tn  this  ca.se  the 
stipulated  rent  paid  by  the  tenant  contains  two  items  in  addi- 
tion to  the  economic  rent,  which  are  (1)  reimbursement  for 
deterioration  of  the  improvements,  viewed  as  means  of  pro- 
15 


226  DISTRIBUTION  OF  WEALTH  [174 

duction,  and  (2)  current  returns  for  the  use  of  the  improve- 
ments, viewed  as  capital  goods.  It  will  be  recalled  that  the 
gross  income  gV  is  composed  of  the  rent  s'r'  and  of  the  cost 
q's',  embracing  cost  of  supplies,  returns  of  capital  goods  and 
wages  of  labor.  The  first  of  these  items,  reimbursement  for 
deterioration,  is  really  a  portion  of  the  cost  of  supplies,  while 
the  second  item  is  part  of  the  returns  of  capital  goods.  Hence 
it  is  to  be  seen  that  after  paying  the  stipulated  rent,  the 
tenant's  residual  share  is  composed  of  wages  of  his  labor  and 
that  of  his  employes,  and  the  returns  due  to  that  part  of  the 
capital  which  he  himself  furnishes. 

174.  Misinterpretations  of  Ricardo's  Law. — The  objec- 
tions that  have  been  raised  against  Ricardo's  law  of  rent  are 
mostly  based  on  a  misinterpretation  of  his  statement  of  the 
law  or  on  a  too  narrow  construction  of  it.  His  land  No.  1  is 
obviously  that  land,  whatever  its  area  may  be,  from  which, 
under  the  existing  circumstances,  the  greatest  amount  of  pro- 
duce can  be  obtained  with  a  given  amount  of  labor.  It  is  not 
necessarily  the  land  which  yields  the  greatest  crop  per  acre. 

By  showing  that  rich  land  often  requires  great  effort  to 
clear,  drain  and  prepare  it  for  cultivation,  and  that  the  early 
settlers  of  a  country,  instead  of  cultivating  the  rich  river 
bottoms,  raised  their  first  crops  on  the  hillsides  which  have  a 
natural  drainage,  Henry  C.  Carey  attempted  to  refute 
Ricardo's  law.  But,  as  a  matter  of  fact,  this  illustration  con- 
stitutes a  confirmation  rather  than  a  refutation.  The  settlers 
selected  the  land  which,  under  the  circumstances,  yielded  the 
greatest  crop  with  the  least  effort. 

In  many  respects  the  illustration  given  by  Ricardo  must 
be  interpreted  liberally  and  with  due  regard  to  general  con- 
ditions. For  instance,  if  different  fields  yield  corn  of  different 
quality,  it  stands  to  reason  that  the  "quarters"  used  for 
measuring  the  poorer  grades  should  be  conceived  so  much  en- 
larged that  "equivalent"  rather  than  "equal"  amounts  of 
the  different  grades  will  be  compared.  Ricardo  gives  the  gist 
of  the  law  in  terms  which,  where  occasion  requires,  must  be 
recast  so  as  to  be  adapted  to  the  case  in  question. 

That  the  term  "fertility"  may  have  reference  to  mineral 


175]  LAND  AND  RENT  227 

as  well  as  agricultural  land  was  also  clearly  shown  by  Ricardo, 
The  cost  of  mining  equal  quantities  in  different  mines  depends 
on  a  number  of  conditions,  all  of  which  have  some  influence 
on  the  profit  that  may  accrue  to  the  mine  owner. 

Nor  should  fertility  alone  be  considered.  Wheat  raised  on 
more  fertile  land  which  happens  to  be  less  advantageously 
situated  may  cost  more  by  the  time  it  is  brought  to  market 
than  that  obtained  from  less  fertile  land  so  located  that  less 
labor  is  required  to  bring  it  to  market.  In  many  cases  location 
is  indeed  the  only  advantage  utilized,  as  is  the  case  with  land 
in  cities.  In  a  store  located  in  the  business  centre  of  a  city 
more  and  larger  sales  can  be  effected  with  equal  effort,  or, 
what  is  the  same,  at  equal  cost,  than  in  smaller  stores  in  out- 
lying districts.  The  labor  of  the  salesman  is  more  ' '  fruitful, ' ' 
so  to  speak.  So  do  advantages  from  location  accrue  to  bankers, 
manufacturers,  shippers  and  others.  "Fertility"  then  loses 
its  literal  significance,  and  commercial  and  industrial  ad- 
vantages take  the  place  of  agricultural  advantages.  It  mat- 
ters not  whether  the  cost  of  production  is  influenced  through 
varying  fertility  or  varying  location,  whether  land  is  used 
for  agriculture  or  for  mining,  for  commercial  or  for  in- 
dustrial purposes,  the  law  of  rent  is  the  same.  Rent  is  always 
the  value  of  the  advantage  derived  from  the  possession  of 
land,  a  value  which,  if  the  occupant  is  a  tenant,  goes  in  general 
to  the  landowner  with  the  stipulated  rent. 

175.  The  Margin  of  Cultivation. — The  objection  which 
has  been  urged  most  persistently  against  Ricardo 's  law  is  based 
on  a  denial  of  the  existence  of  "no-rent"  land,  namely,  land 
the  use  of  which  can  be  obtained  without  the  payment  of  rent, 
Ifijirl  which  has  not  yet  been  brought  into  use  because  of  the 
limited  demand  for  its  products.  If  it  were  true  that  there 
is  no  ultra-marginal  land,  or  that  there  is  no  point  of  diminish- 
ing returns,  Ricardo 's  law  of  rent  would  have  no  basis,  for  we 
can  measure  the  advantages  which  one  piece  of  land  affords 
only  by  adopting  as  a  standard  of  comparison  some  other 
land,  the  advantages  of  which  are  taken  as  zero. 

There  is  no  justification  for  denying  the  existence  of  "no- 


228  DISTRIBUTION  OF  WEALTH  [175 

rent"  land  while  there  are  vast  tracts  of  land  still  uncultivated 
in  various  quarters  of  the  globe,  or  while  it  is  still  possible  to 
reclaim  land  from  swamps  or  seas,  or  even  as  long  as  the 
intensity  of  cultivation  of  land  already  in  use  can  be  still 
further  increased  (178), 

The  denial  of  the  existence  of  no-rent  land  is  seemingly 
justified  by  the  fact  that  land  which  is  at  the  margin  for  some 
particular  use  is  not  rent-free.  Thus  suburban  land  which  to 
all  appearances  is  just  beyond  the  margin  of  urban  utility, 
even  though  at  the  moment  lying  idle,  cannot  be  obtained 
without  the  payment  of  rent.  We  shall  presently  see,  however, 
that  this  affords  no  basis  for  the  denial,  and  that  this  con- 
dition is  quite  consistent  with  the  theory  of  rent. 

176.  Cumulative  Rent. — Land  is  adapted  for  various 
alternate  uses.  It  may  be  used  for  grazing,  for  growing 
wheat,  for  raising  garden  truck,  for  residences,  or  for  manu- 
facturing, bank  or  office  buildings.  These  different  uses  range 
themselves  in  the  order  of  their  importance  about  market 
centres.  In  the  heart  of  a  city  the  demand  for  land  for  mer- 
cantile use  is  greater  than  for  any  other  purpose.  In  the  zone 
surrounding  the  centre  the  prevailing  demand  is  for  factories 
and  dwellings.  At  a  still  greater  distance  the  margin  for  this 
use  is  passed  and  truck  farming  and  other  forms  of  intensive 
culture  is  in  place.  Then  comes  land  given  to  extensive  farm- 
ing, and  finally,  farthest  away,  cattle  ranges  and  woodlands 
will  be  found,  interspersed  with  areas  wholly  unused. 

In  our  study  of  this  topic  complications  can  be  minimized 
if  we  at  first  apply  the  argument  to  a  single  market  centre 
and  assume  that  the  surrounding  land  is  throughout  of  equal 
fertility  and  that  the  cost  of  transportation  from  all  directions 
to  the  centre  is  proportionate  only  to  distance.  Under  these 
conditions  the  dift'erent  uses  to  which  the  land  can  be  put 
naturally  range  themselves  in  a  series  of  concentric  zones 
around  the  market.  The  cattle  raiser  occupies  the  most  dis- 
tant land,  bordering  on  the  actual  margin  of  cultivation. 
Those  stretches  of  this  land  which  are  nearest  to  the  market 
centre  are  slightly  preferable  to  the  more  outlying  parts  and 
are  therefore  slightly  rent-bearing,  hence  the  line  where  agri- 


177]  LAND  AND  RENT  229 

cultural  use  begins  is  already  a  zone  of  land  that  can  no 
longer  be  had  without  paying  rent,  and  the  margin  of  farm- 
ing is  not  no-rent  land.  The  marginal  farmer  must  compete 
with  the  intra-marginal  rancher." 

The  farms  that  are  nearer  the  market  are  preferred  to  those 
that  are  more  distant  and  therefore  yield  a  higher  rent.  Thus 
it  happens  that  the  marginal  truck  farmer  must  pay  a  rent 
equal  to  that  returned  by  the  most  favorably  located  farm  land. 
In  short,  the  land  lying  at  the  margin  of  any  one  of  the  uses 
affords  a  rent  consisting  of  the  cumulation  of  the  rent  afforded 
by  the  less  important  uses  of  the  land  which  lies  between  this 
margin  and  the  outermost  margin  of  cultivation. 

But  the  uniformity  in  the  characteristics  of  land  which  we 
have  assumed  in  the  above  illustration  does  not  really  exist. 
The  concentric  arrangement  of  the  several  margins  is  there- 
fore to  be  taken  in  a  figurative  sense.  The  lines  by  which  the 
several  uses  are  separated  are  in  reality  exceedingly  irregular 
for  quite  obvious  reasons.  The  markets  for  many  products 
are  actually  outside  of  their  margin  of  cultivation,  as  in  the 
case  of  tropical  fruit,  spices  and  mineral  products.  We  further- 
more must  consider  that  the  number  of  markets  is  practically 
unlimited,  each  competing  with  its  neighbor  for  the  products 
of  the  adjacent  lands,  and  that  for  this  reason  the  marginal 
lines  are  completely  interwoven.  For  all  that,  the  general 
theory  of  rent,  and,  coincidently,  that  of  cumulative  rent,  is 
not  thereby  vitiated,  but  only  enveloped  in  a  multitude  of 
complications. 

177.  Intensity  of  Cultivation. — The  yield  of  any  piece  of 
land  is  not  a  fixed  (juantity,  but  depends  on  several  conditions, 
among  others  on  the  amount  of  labor  and  capital  applied  to  its 
cultivation.  Land  can  be  cultivated  with  greater  or  less  "in- 
tensity," and  for  each  degree  of  cultivation  its  yield  is 
different. 

For  the  present  we  shall  leave  out  of  consideration  the 
effect  of  all  other  variable  factors,  such  as  the  weather  and 
the  more  or  less  intelligent  management,  by  assuming  these 

a  Vf.  Seager,  pp.  230-232. 


230  DISTRIBUTION  OF  WEALTH  [i78 

to  be  normal.  The  latter  variations  affect  principally  chance 
profits  in  one  case,  and  manager's  wages  in  the  other. 

The  yield  of  land  is  increased  with  the  application  of  more 
labor  and  capital,  or,  to  put  it  briefly,  of  greater  effort.  But 
it  does  not  increase  in  the  same  proportion  as  the  effort.  The 
productivity  of  land  holds  a  relation  to  the  intensity  of  cul- 
tivation similar  to  that  existing  between  productivity  of  labor 
and  amount  of  capital.  The  increase  of  productivity  of  land 
does  not  keep  pace  with  that  of  effort  applied  to  it,  the 
progression  in  that  respect  being  more  or  less  similar  to  the 
cuTwe  shown  in  Fig.  14,  illustrating  the  relation  of  capital  to 
the  productivity  of  labor. 

In  the  present  study,  however,  the  diagram  will  be  more 
instructive  if  the  yield  is  presented,  as  in  Fig.  16,  in  a  differ- 
entiated instead  of  an  integrated  form.  Land  cultivated  with 
little  effort  will  bring  forth  little;  but  each  additional  effort 
will  increase  the  output.  Imagine  successive  instalments  of 
effort,  Oa,  ah,  he,  and  so  forth,  to  be  laid  off  on  the  horizontal 
axis  of  Fig.  21,  and  the  output  of  each  separate  instalment  to 
be  laid  off  in  the  vertical  direction,  so  that  the  yield  of  the 
first  instalment  of  effort  Oa  is  represented  by  the  area  Oaa'Y, 
the  yield  of  the  second  instalment  ah  by  ahh'a',  etc.,  the  curve 
YY'  denoting  the  land's  productivity. 

Figuratively  speaking,  we  may  consider  the  piece  of  land 
under  consideration  to  be  composed  of  a  number  of  super- 
posed layers  of  land — successive  stories,  so  to  speak — each  of 
which  can  take  up  no  more  than  one  of  the  increments  of 
effort.  The  yield  of  the  first  layer,  when  put  under  cultiva- 
tion, would  equal  the  area  Oaa'Y,  that  of  the  second  ahh'a', 
and  so  on,  each  succeeding  layer  yielding  less  than  the  pre- 
ceding one. 

178.  The  Point  of  Diminishing  Returns. — Having  assumed 
all  the  successive  instalments  of  effort  and,  accordingly,  of 
cost,  to  be  equal,  this  cost  can  be  represented  by  the  ordinate 
of  the  horizontal  line  CC.  The  diagram  then  elucidates  the 
fact  that  the  instalment  cd  is  the  last  one  which  produces  a 
yield  greater  than  its  cost.  The  point  d  is  manifestly  the  point 
of  ' '  diminishing  returns ' '  and  delimits  the  most  advantageous 


179]  LAND  AND  RENT  231 

intensity  of  cultivation.  The  area  Odd'C  then  represents  the 
value  of  the  total  efforts,  while  the  area  Odd'Y  measures  the 
value  of  the  total  yield,  and,  accordingly,  the  area  Cd'Y,  which 
indicates  the  excess  of  the  value  of  the  product  over  its  cost, 
represents  the  rent  yielded  by  the  piece  of  land. 

It  is  now  seen  that  the  total  value  of  the  produce  of  the 
land  in  question,  represented  by  the  area  Odd'Y,  is  divided 
into  two  parts.  Of  these,  the  part  Odd'C  represents  the  cost 
of  producing  the  goods,  comprising  cost  of  supplies,  value  of 
labor  and  charges  for  the  use  of  the  capital  other  than  land. 
The  other  part,  Cd'Y,  goes  as  rent  to  the  landlord  for  the  use 
of  the  land  (185). 

Now  suppose  that  the  demand  for  the  produce  of  the  land 
is  increased,  say  through  an  increase  of  population.  In  con- 
sequence the  value  of  the  produce  rises  and  is  then  represented 
by  the  curve  ZZ'.  It  then  pays  to  increase  the  intensity  of 
cultivation  to  the  point  /.  To  use  our  figure  of  speech,  two 
more  layers  or  "stories"  are  brought  into  use  and  the  yield 
is  increased  not  only  in  value,  but  also  in  absolute  quantity.  It 
is  also  apparent  that  the  rent  of  the  land  rises  from  Cd'Y  to 
Cf'Z. 

Before  the  increase  of  demand  as  here  assumed  takes  place, 
the  layers  or  "stories"  de  and  ef  are  beyond  the  margin  of 
cultivation,  since  the  value  of  their  yield  is  then  less  than  the 
cost  of  cultivation.  By  an  increase  of  the  demand  they  are 
brought  into  requisition,  just  as  any  previously  existing  ultra- 
marginal  land  would  be  put  to  use  under  like  circumstances. 
From  this  viewpoint  it  can  be  seen  that  there  is  marginal  land 
(175),  at  least  in  a  figurative  sense,  in  the  midst  of  highly 
cultivated  sections,  nay,  in  the  very  business  centres  of  cities, 
and  these  marginal  sections  are  free  even  of  cumulative  rent. 
The  erection  of  lofty  office  buildings  is  nothing  else  than  bring- 
ing into  requisition  the  marginal  layers  or  "stories" — an  ex- 
pression which  in  this  case  is  literally  applicable — of  the  land, 
by  increasing  thf  "intensity  of  cultivation." 

179.  The  Personal  Factor  in  Rent. — The  yield  of  land, 
and  with  it  tlu-  rent,  is  influenced  not  only  by  the  intensity  of 


232  DISTRIBUTION  OF  WEALTH  [179 

cultivation,  but  also  by  the  personal  ability  and  foresight  of 
the  occupant,  both  as  regards  the  selection  of  the  special  use  to 
which  the  land  is  to  be  put  and  the  intelligence  and  energy 
with  which  the  productive  efforts  are  applied. 

An  acre  of  land  in  the  centre  of  the  city  of  New  York,  if 
used  for  raising  potatoes,  would  bring  materially  less  rent 
than  if  used  for  office  buildings  or  stores.  An  equal  area  of 
land  in  the  country,  say  a  hundred  miles  from  New  York, 
would,  on  the  contrary,  bring  a  higher  rent  as  a  potato  patch 
than  as  a  store  site.  And  if  this  acre  were  in  the  north  of 
Texas,  the  distance  of  the  nearest  market  would  even  forbid 
the  growing  of  potatoes,  the  land  being  available  only  for  the 
lowest  degree  of  cultivation,  such  as  the  grazing  of  cattle. 
The  judicious  selection  of  the  use  of  any  piece  of  land,  accord- 
ing to  circumstances,  is  an  essential  factor  in  obtaining  the 
highest  possible  rent  from  it. 

But  even  as  regards  a  given  use,  the  returns  obtainable 
depend  further  on  the  personal  ability  of  the  user.  Taking  an 
acre  best  adapted  for  raising  potatoes,  it  is  found  that  one  man 
is  able  to  raise  a  larger  crop  than  another,  because  of  difference 
in  intelligence,  diligence  and  skill. 

Among  those  desirous  of  utilizing  any  piece  of  land  there 
are  always  some  who  can  put  it  to  better  use  than  others,  and 
these  can  always  outbid  their  competitors.  For  the  land  of  a 
commercial  or  industrial  centre  the  banker,  the  merchant,  the 
manufacturer  are  the  highest  bidders,  and  when  these  have 
secured  their  location,  they  are  eliminated  as  competitors  for 
the  use  of  the  more  distant  land  which  is  open  to  competition 
among  the  remaining  competitors.  It  is  in  this  way  that  under 
the  impulse  of  competition  the  occupancy  of  land  is  so  ad- 
justed among  the  different  possible  occupants  that  the  land 
finds  its  most  productive  use  and  accordingly  yields  the 
highest  rent,  taking  into  account  the  different  capabilities  of 
those  different  occupants. 

It  must,  of  course,  be  understood  that  we  are  here  dealing 
only  with  general  tendencies.  The  theoretical  result  is  not 
necessarily  realized  in  each  separate  case.  Yet,  generally 
speaking,  the  facts  are  in  accord  with  this  theory.    The  most 


180]  LAND  AND  RENT  233 

advantageous  land  returns  a  particularly  high  rent  because 
it  is  being  put  to  the  most  advantageous  use  by  those  most 
capable  of  doing  so,  the  less  advantageous  land  being  left  to 
those  who,  in  their  turn,  can  get  the  most  out  of  it. 

i8o.  The  Source  of  Rent. — Rent,  like  wages,  can  be  con- 
ceived in  three  forms.  Of  two  settlers  one  may  have  taken  up 
land  that  is  more  fertile  than  that  taken  up  by  the  other,  and 
who  therefore  can  maintain  his  existence  with  less  effort.  He 
obtains  rent  in  the  foim  of  greater  comforts  of  life.  This  may 
be  regarded  as  the  basic  form  of  rent.  The  second  develops 
when  these  settlers  as  farmers  bring  their  produce  to  market. 
Supposing  the  settler  on  the  poorer  land  to  be  at  the  margin 
of  cultivation,  he  will  obtain  a  price  for  his  produce  which 
pays  him  only  as  much  as  he  could  earn  at  market  rate  of 
wages.  His  more  fortunate  neighbor,  inasmuch  as  he  can 
grow  a  greater  quantity  with  the  same  amount  of  effort,  can 
sell  his  produce  at  a  price  that  nets  him  an  income  exceeding 
what  he  could  earn  as  a  farm  hand.  This  excess,  the  second 
foraa  of  rent,  appears  as  a  definite  profit,  usually  in  the  form 
of  money.  And  if  the  owner  of  the  intra-marginal  land 
leases  it  to  a  tenant,  he  obtains  rent  in  its  third  form,  namely 
as  a  stipulated  periodic  payment  of  money  or  its  equivalent. 
At  this  point  we  are  concerned  mainly  with  rent  in  its  second 
form,  namely  in  the  form  of  a  share  of  the  gross  income  of  a 
productive  group,  and  with  the  way  in  which  that  share  is 
determined. 

The  process  by  which  rent,  viewed  as  a  share  of  the  total 
value  of  the  produce  of  land,  is  determined,  has  been  clearly 
set  forth  by  Ricardo.  Products  obtained  from  intra-marginal 
land  require  less  labor  to  prepare  for  the  market  than  equal 
products  obtained  from  land  at  the  margin  of  production  (7). 
But  in  the  market  equal  products,  however  obtained,  command 
an  equal  price,  a  price  determined  by  the  marginal  cost.  The 
excess  of  the  price  over  the  cost  of  things  produced  on  intra- 
marginal  land  is  rent.  It  is  due  to  the  advantages  afforded 
by  conditions  of  fertility  and  location  of  the  land  (154)  and 
accrues  in  the  first  place  to  the  user  of  the  land. 


234  DISTRIBUTION  OF  WEALTH  [180 

By  way  of  illustration  we  may  assume  that  for  obtaining  a 
given  amount  of  produce,  the  cost  on  land  No.  1  is  $50,  on 
land  No.  2  it  is  $60,  and  on  land  No.  3  it  is  $70.  It  is  under- 
stood that  cost  is  here  meant  to  embrace  all  anterior  charges, 
normal  wages  of  labor,  including  that  of  superintendence,  and 
current  interest  on  the  capital  goods  employed,  but  no  charges 
for  the  use  of  land. 

If  now  the  demand  for  the  produce  of  the  land  is  such 
that  the  yields  of  land  Nos.  1,  2  and  3  will  just  fully  supply  it, 
then  land  No.  3  is  at  the  margin  and  the  market  price  of  the 
given  amount  of  the  produce  is  $70  (62).  The  cultivators  of 
land  Nos.  1  and  2,  in  producing  and  selling  the  given  amount, 
accordingly  score  a  profit  of  $20  and  $10,  respectively. 

Those  who  buy  the  produce  of  land  No.  1  give  $70  in  ex- 
change for  that  which  normally  costs  only  $50  to  produce. 
The  difference,  namely,  $20,  is  the  rent  realized  through  the 
sale  of  the  given  amount  of  the  produce  of  land  No.  1.  These 
$20  represent  just  so  much  of  the  value  of  the  purchaser's 
labor.  It  is  therefore  manifest  that  rent  is  a  value  furnished, 
not  by  the  producers  of  the  goods  sold,  but  by  the  purchasers 
of  those  goods  (323,  370). 

Where  land  is  used  for  industrial  and  commercial  pursuits, 
equal  amounts  of  effort  have  greater  or  less  effect,  according 
to  location  and  surroundings;  hence  the  above  conclusion  is 
true  for  such  land  as  well  as  for  agricultural  land. 

Reverting  to  diagram  Fig.  20  it  will  be  seen  that  by  the 
sale  of  the  total  quantity  Oq  of  the  produce  at  the  normal  price 
qa,  the  cultivators  of  the  land  from  which  the  various  elements 
of  the  supply  come  receive  value  represented  by  the  area  Oqap, 
while,  as  will  be  understood  by  remembering  that  the  effort  of 
producing  the  element  q'  is  represented  by  q's' — they  actually 
expend  efforts  of  a  value  equal  to  the  area  OqaS.  The  sellers 
furnish  services  measured  by  the  area  OqaS,  while  the  pur- 
chasers furnish  services  measured  by  the  area  Oqap,  hence  the 
difference  measured  by  the  area  Sap  is  an  excess  of  services 
rendered  by  the  purchasers,  and  this  excess  constitutes  rent. 
Rent,  then,  is  the  result  of  an  exchange  of  unequal  services. 
It  is  acquired  by  the  owners  of  the  land,  but  is  produced  by  the 


I 


181]  LAND  AND  RENT  235 

efforts  of  the  purchasers  of  the  products  and,  accordingly,  by 
the  community  in  general.  The  significance  of  this  fact  will 
be  considered  later. 

i8i.  Land  Values.— The  portion  BE,  Fig.  13,  of  the  net 
income  of  a  productive  group  which  goes  to  capital  is  ordi- 
narily divided  into  at  least  two  parts,  namely  rent  BC  and 
capital  interest  CE,  of  which,  in  many  cases,  a  portion  DE 
accrues  as  interest  to  lenders  of  money.  The  conditions  which 
detei-mine  the  first  of  these  parts  have  now  been  fully  dis- 
cussed. But,  as  stated  before  (131),  we  must  not  only  find 
why  each  one  of  the  three  forms  of  capital  brings  an  income, 
but  also  why  it  is  that  the  rate  of  this  income  is  practically 
equal  for  all  three  forms.  To  elucidate  this  in  relation  to 
land,  we  must  ascertain  why  it  is  that  the  ratio  of  the  land- 
owner's gains  to  the  value  of  his  land  agrees  with  the  current 
rate  of  interest.  To  this  end  we  must  now  seek  for  the  causes 
which  determine  the  value  of  land. 

Since  land  is  not  produced  by  labor,  we  cannot  arrive  at 
its  value  through  the  "marginal  effort"  of  its  production. 
Nor  can  we  turn  to  "final  utility,"  since  land  devoted  to 
industry  and  commerce  is  not  in  course  of  consumption,  and 
its  utility  exists  only  in  a  latent  or  potential  state.  We  must 
have  recourse  to  the  method  of  "capitalization"  (65),  by 
comparison  of  land  with  money  or  with  capital  goods  on  the 
basis  of  the  one  property  which  they  have  in  common,  namely 
the  power  of  bringing  an  income  (190). 

It  has  indeed  long  been  recognized  that  the  value  of  land 
depends  upon  two  items,  namely,  the  rent  it  returns  and  the 
current  rate  of  interest,  and  this  relation  is  usually  i)ut  in  the 
form  of  the  statement  that  the  value  of  land  equals  the  rent 
capitalized  at  the  current  rate  of  interest. 

This  statement  of  the  case  needs  qualification  in  the  light 
of  two  considerations.  In  the  first  place,  experience  tells  that 
land  is  subject  to  continued  changes  of  value,  the  rule  being 
that  land  values  steadily  increase.  This  increase  Ls  known  as 
the  "unearned  increment."  Tlie  owner  of  land  derives  a 
profit  from  this  source  as  well  as  from  rent.    Accordingly,  the 


236  DISTRIBUTION  OF  WEALTH  [isi 

gross  gain  derived  from  land  is  increment  in  addition  to  rent. 

In  the  second  place,  real  estate  is  subject  to  a  tax,  and 
where  this  tax  is  in  proportion  to  the  value  of  the  estate,  the 
rate  of  taxation  has  a  reacting  influence  on  the  value  of  the 
land.  The  value  of  real  estate  consists  of  the  value  of  the 
land  and  that  of  the  improvements.  Since  the  latter  must  be 
regarded  as  capital  goods,  the  tax  apportioned  to  them  must 
here  be  left  out  of  account.  But  that  portion  of  the  tax  im- 
posed on  the  value  of  the  land  has  a  direct  bearing  on  the 
subject  before  us,  as  it  reduces  the  profits  of  the  landowner. 

The  net  profits  derived  from  land  are  therefore  equal  to 
rent  plus  unearned  increment  minus  tax,  or,  putting  it  in 
algebraic  form,  R  -\- TJ  —  T,  where  R  is  the  annual  rent,  V 
the  annual  unearned  increment  and  T  the  annual  tax  assessed 
on  the  land.  The  landowner  retains  only  a  portion  of  the 
gross  profits. 

The  unearned  increment  is  governed  principally  by  three 
conditions :  ( 1 )  by  the  gradual  increase  of  rent,  for  the  most 
part  due  to  the  growth  of  population,  to  the  increase  of 
means  of  communication  and  to  other  conditions  that  make 
the  location  more  advantageous;  (2)  by  the  gradual  change 
that  takes  place  in  the  rate  of  interest  which,  according  to 
experience,  has  been  generally  falling;  and  (3)  by  a  possible 
change  in  the  rate  of  land  taxation.  A  study  of  the  operation 
of  these  three  causes  would  lead  to  complications  which  for 
our  purpose  may  be  avoided  by  considering,  in  each  specific 
ease,  the  unearned  increment  as  a  known  quantity,  indicated 
by  past  experience. 

There  are  cases  of  land  values  which  are  actually  falling. 
In  such  cases  the  unearned  increment  has  to  be  treated  as  a 
minus  quantity. 

Furthermore,  it  may  also  happen  that  the  value  of  land, 
expressed  in  dollars,  rises  or  falls  as  a  result  of  changes  in  the 
value  of  gold  in  relation  to  other  things  generally.  In  such 
case  a  rise  would  be  merely  apparent  and  would  not  be  an 
"unearned"  increment  at  all,  nor  would  such  a  fall  in  value 
be  other  than  merely  nominal. 


182]  LAND  AND  RENT  237 

182.  The  Law  of  Land  Value. — The  proposition  that  land 
values  equal  the  rent  capitalized  at  the  current  rate  of  in- 
terest is  ob\aously  not  correct.  To  put  it  right,  "net  profits" 
must  be  substituted  for  "rent"  in  the  statement.  The  owner 
of  land  will  sell  it  only  for  a  sum  of  money  which,  when  loaned 
or  invested,  brings  returns  equal  to  these  net  gains. 

This  law  of  land  values  can  be  expressed  algebraically. 
Let  V  be  the  value  of  the  land,  R  the  annual  rent,  U  the  annual 
unearned  increment,  T  the  annual  tax,  I  the  landowner's 
profit,  i  the  current  rate  per  cent,  of  pure  interest  and  t  the 
actual  rate  per  cent,  of  land  taxation  (327,  328a).  This  last 
rate,  it  should  be  observed,  is  not  necessarily  the  nominal  rate 
of  taxation.  Where  it  is  customary  to  assess  land  a  certain 
percentage  below  the  actual  market  value,  the  factor  t  should 
be  obtained  by  reducing  the  nominal  tax  rate  in  the  same  pro- 
portion, so  that  this  corrected  factor  represents  the  ratio  of 
the  tax  actually  assessed  to  the  actual  selling  value  of  the  land. 

The  value  of  land  may  then  be  expressed  by  the  formula : 

(1)  y  =  100  (RJ^U  —  T)-^  i. 

By  substituting  for  T  its  value,  t  X  y,  and  solving  the 
equation  for  V ,  it  will  be  found  that : 

(2)  V  =  100  (RJ^V)-^  (i  +  t). 

This  last  equation  may  be  interpreted  as  follows:  Land 
values  tend  to  equal  the  gross  gains  R  -\-  TJ,  capitalized  at  a 
rate  obtained  by  adding  the  actual  rate  of  taxation  to  the 
current  rate  of  pure  interest. 

An  illustration  will  mai^e  this  clear.  Suppose  a  piece  of 
land  to  bring  an  annual  rent  of  .^900,  while  the  annual  un- 
earned increment  amounts  to  .$300.  Let  the  current  rate  i  of 
pure  interest  be  4  per  cent,  and  the  rate  t  of  land  tax  2  per 
cent.  According  to  the  last  equation  the  value  of  this  land 
will  be  $1200  capitalized  at  4  +  2,  that  is,  at  6  per  cent, 
which  will  make  the  value  $20,000  (328/>).  The  tax,  at  the 
rate  of  2  per  cent.,  will  then  be  .$400  and  the  net  gain  accruing 
to  the  landowner  .$800,  and  this,  in  fact,  represents  an  income 
of  4  per  cent,  on  an  investment  of  $20,000. 


238  DISTRIBUTION  OF  WEALTH  [183.  184 

183.  Speculative  Land  Value. — If  we  had  assumed  the 
simpler  case,  in  which  the  land  value  is  stationary  and  the 
rent  of  $900  the  only  source  of  gain  from  the  land,  we  should 
have  found  that  the  value  of  this  piece  of  land  would  be 
$15,000  instead  of  $20,000  (278,  328).  The  excess  of  the 
value  of  the  first  over  that  of  the  second  case,  namely  $5000, 
has  been  tenned  "speculative  land  value"  (361),  as  it  cannot 
be  accounted  for  by  the  rent  alone,  but  is  due  to  an  expected 
increase  of  value  likely  to  occur  in  the  future. 

It  is  quite  consistent  with  the  result  of  our  analysis  to 
consider  land  values  as  being  made  up  of  two  items,  namely, 
the  value  directly  due  to  the  rent  and  that  due  to  the  unearned 
increment.  In  the  above  illustration  the  first  item  would  be 
equal  to  the  rent  of  $900  capitalized  at  6  per  cent.,  or  $15,000, 
while  the  second  item  would  be  normal  increment  of  $300 
treated  in  the  same  way,  resulting  in  $5000. 

184.  Division  of  the  Gross  Profits  Derived  from  Land. — 
From  formula  (2)  we  can  derive  further  information.  The 
net  profit  I  of  the  landowner  equals  i  per  cent.,  or  i  one- 
hundredths,  of  the  value  of  the  land,  namely : 

(3)  I  =  i(B  +  U)^(i+t), 

and  the  land  tax  equals  t  per  cent,  of  the  same  value,  namely : 

(4  T  =  t(R-^U)-^(i  + 1), 

and  this  in  our  illustration  yields  $800  and  $400,  respectively. 
We  find,  accordingly,  that  the  total  gross  gain  derived  from 
land,  namely  B  -{-  U,  is  divided  into  two  shares,  /  and  T,  which 
bear  the  same  ratio  to  one  another  as  the  current  rate  of  in- 
terest i  bears  to  the  rate  of  taxation  t.  The  one  constitutes  the 
gain  of  the  landowner,  the  other  an  income  of  the  community. 
It  follows  that  the  gross  profit  yielded  hy  la^id,  7iamely  rent 
plus  increment,  is  really  shared  hetween  landowner  and  com- 
munity, the  respective  parts  having  the  same  ratio  as  that 
which  the  current  interest  rate  hears  to  the  tax  rate.  This 
being  true  for  the  sum  B  -{-U,\t  is  also  true  if  the  two  items 
B  and  U  are  considered  separately  (324,  325,  327). 


185]  LAND  AND  RENT  239 

The  value  here  discussed  is,  of  course,  the  value  of  the  land 
independent  of  the  improvements  that  may  be  located  on  it. 

It  is  scarcely  possible  to  reiterate  too  often  that  our  reason- 
ing relates  to  general  tendencies.  In  individual  cases  exchanges 
may  be  effected  at  rates  more  or  less  departing  from  the  results 
indicated  by  these  formulas. 

185.  Summary. — In  our  quest  for  the  causes  which  control 
the  division  of  the  net  income  BG,  Fig.  13,  of  productive 
groups,  we  have  seen  how  one  of  the  items  of  the  division, 
namely  the  rent  BC,  is  definitely  determined.  Fig.  20  clearly 
illustrates  the  process  by  which  the  net  income  of  a  group  is 
divided  into  two  parts.  To  illustrate:  the  net  income  q'r'  of 
the  group  furnishing  the  portion  q'  falls  into  two  parts,  of 
which  s'r'  goes  to  the  landowner  (178),^'-'  the  other  part,  q's 
being  left  to  pay  for  the  services  of  the  other  forms  of  capital 
and  of  labor.  The  economic  forces  which  determine  this 
division  are  universally  recognized.  Of  the  three  shares :  rent, 
capital  returns  and  wages,  the  first,  namely  rent,  represented 
by  BC  in  Fig.  13,  equals  the  advantages  which  the  land  em- 
ployed affords  over  marginal  land,  and  therefore  depends  on 
relative  fertility  and  advantages  of  location. 

We  have  also  found  why  it  is  that  the  rate  of  the  total  net 
gains  of  land  ownership  in  relation  to  the  value  of  the  land 
itself  is  as  a  rule  the  same  as  the  current  rate  of  interest  (131, 
267),  and  that  the  reason  lies  in  the  fact  that  the  value  of 
land  adapts  itself  to  the  interest  rate,  rising  as  the  rate  o\ 
interest  falls,  and  vice  versa.  But  what  it  is  that  determines 
the  rate  of  interest  we  have  yet  to  discover,  and  until  this  is 
found  we  cannot  bring  our  analysis  of  land  values  to  a  definite 
conclusion  (323). 

"•  The  fact  that  the  landowner  must  subsequently  share  his  income 
sV  with  the  community  throuf,'h  taxation  of  the  land  cannot  react  on 
tiie  division  of  the  net  income  q'r'  of  the  yroup  into  tiie  two  shares  q's' 
and  n'r'. 


CHAPTER  X 
CAPITAL  GOODS  AND  CAPITAL  RETURNS 

1 86.  Capital  Interest. — A  full  understanding  of  capital 
profits  cannot  be  reached  until  the  causes  for  all  three  forms 
of  these  profits — rent,  capital  interest,  and  money  interest — 
have  been  found.  The  rent-producing  power  has  been  cor- 
rectly traced  to  its  origin  by  Ricardo  's  law  of  rent,  and  with  a 
view  of  learning  whether  the  power  of  capital  goods  and  of 
money  to  command  interest  has  been  similarly  traced,  we  shall 
now  briefly  review  some  of  the  principal  theories  that  have 
been  advanced  to  explain  interest. 

We  know  from  experience  that  capital  goods  in  productive 
use  yield  an  income  to  their  owner.  The  value  of  things  pro- 
duced by  labor  with  the  aid  of  capital  commonly  exceeds  the 
cost  of  their  production,  when  that  cost  is  considered  from 
the  standpoint  of  the  owner  of  the  capital  goods,  that  is,  when 
"cost"  includes  all  charges  for  supplies,  for  labor  and  for 
land,  in  short,  all  items  of  cost  except  charges  for  the  use  of 
the  capital  goods  employed  (61).  The  excess  of  the  value  of 
the  product  over  this  cost  constitutes  the  profits  or  returns 
that  accnie  to  capital  goods  (209). 

In  the  present  discourse  capital  goods  must  be  understood 
as  comprising  not  only  means  of  production,  but  goods  in 
course  of  production  as  well;  not  only  looms,  but  yams  also 
(132,  191). 

In  view  of  the  contentions  which  so  frequently  arise  be- 
tween  labor  and  capital  regarding  the  proper  sharing  of  the 
value  of  their  joint  products,  it  is  important  that  the  cause 
which  determines  the  rate  of  this  division  be  thoroughly 
understood. 

187.  Distinction  of  Capital  Interest  and  Rent. — The  line 
of  reasoning  by  which  rent  is  explained  is  apparently  not 
applicable  to  account  for  the  profits  that  accrue  to  capital 
goods  (258).     Land  exists  in  various  grades — good,  medium 

240 


188]  CAPITAL  GOODS  AND  RETURNS  241 

and  poor — and  the  grade  of  land  is  not  dependent  on  the 
efforts  of  the  owner.  No  amount  of  cultivation,  however  in- 
telligently directed,  can  make  an  acre  of  land  in  the  deserts  of 
Arizona  return  as  much  rent  as  an  acre  in  the  centre  of  the 
city  of  New  York.  Capital  goods,  on  the  other  hand,  are 
neither  dependent  on  the  fickle  bounty  of  nature,  nor  are  they 
held  down  to  a  definite  location.  Differences  in  the  income 
obtained  through  their  use  are  due  principally  to  their  more 
or  less  intelligent  utilization,  and  such  differences  affect  wages 
of  the  employer  rather  than  returns  accruing  to  the  capitalist. 
An  analogy  between  capital  returns  and  rent  would  therefore 
seem  to  be  out  of  the  question. 

1 88.  Distinction  of  Capital  Interest  and  Money  Interest. 
— It  is  generally  taken  for  granted  that  the  lender  of  money 
with  which  capital  goods  are  bought  is  properly  entitled  to 
the  profits,  or  a  share  of  the  profits,  obtained  through  the 
employment  of  those  capital  goods,  on  the  ground  that  the 
lender  of  the  money  is  really  the  lender  of  the  capital.  But 
when  it  is  considered  that  the  money  itself  is  always  idle 
capital  and  has  no  capacity  for  production  (134),  the  proposi- 
tion that  these  capital  returns,  or  any  portion  of  them,  are 
payable  as  interest  to  the  lender  of  money,  simply  because 
capital  goods  bought  with  this  money  can  be  made  to  yield 
returns,  is  no  more  self-evident  than  would  be  a  proposition 
that  the  profits  of  a  factory  should  be  turned  over  to  the 
supplier  of  lubricating  oil,  because  without  lubricant  of  some 
kind  the  machines  could  not  be  operated  successfully.  The 
interest  commanding  power  of  money  is  therefore  not  a  eon- 
sequence  of  the  revenue  yielding  power  of  capital  goods,  and 
the  subject  of  money  interest  must  be  considered  apart  from 
that  of  capital  interest  (138),  even  though  the  one  is  closely 
related  to  the  other.  We  shall  therefore  first  confine  our 
attention  to  the  theories  that  seek  to  explain  why  interest 
accrues  to  capital  goods  employed  in  the  processes  of  pro- 
duction, and  leave  the  relation  of  money  to  interest  for  subse- 
quent consideration  (130).  We  cannot,  however,  completely 
eliminate  reference  to  money  interest  when  reviewing  these 
theories,  for  most  of  these  do  not  recognize  the  distinction. 
16 


242  DISTRIBUTION  OF  WEALTH  [i89.  190 

189.  Current  Theories  of  Interest. — The  power  of  money 
to  command  interest,  as  well  as  the  disputes  regarding  the 
propriety  of  taking  interest,  date  back  to  ancient  history.  It 
is,  however,  only  in  recent  times  that  attempts  have  been 
made  to  explain  why  it  is  that  money  and  capital  goods  pos- 
sess this  power.  In  the  first  attempts  of  this  kind,  among 
which  those  of  Calvin  and  Turgot  are  to  be  counted,  the 
power  of  one  form  of  capital  was  attributed  to  the  like  power 
of  another  form.  These  explanations  accordingly  fail  to  go 
back  to  the  original  cause.  Subsequently  various  theories 
have  been  advanced  in  the  endeavor  to  explain  the  funda- 
mental cause  of  interest.  These  theories  may  be  divided  into 
two  categories :  first,  those  wliich  assume  interest  to  be  due  to 
natural  and  inevitable  conditions,  and  second,  those  which 
assume  it  to  arise  from  conditions  which  are  purely  conven- 
tional and  unnatural.  The  first  of  these  can  be  subdivided 
into  two  classes,  one  of  which  comprises  those  theories  that 
attribute  interest  to  a  service  rendered  by  the  tJmig,  namely 
capital,  while  the  other  includes  those  conceptions  of  the  sub- 
ject which  consider  the  service  as  being  rendered  by  the  owner 
of  the  thing,  namely,  the  capitalist. 

We  have  thus  altogether  to  deal  with  three  distinct  ideas, 
namely:  (1)  the  productivity  theories;  (2)  the  abstinence 
theory  and  its  variant,  the  ' '  Positive  Theory  of  Capital, ' '  and 
(3)  the  exploitation  or  socialistic  theory. 

A  very  comprehensive  review  and  critical  analysis  of  the 
earlier  theories  of  the  subject  of  interest  is  that  published  by 
Eugen  V,  Bohm-Bawerk  in  1884.^°  In  this  work  the  defects 
of  the  various  theories  treated  are  exhaustively  discussed,  and 
we  need  therefore  but  briefly  touch  upon  these  earlier  theories, 
Bohm-Bawerk 's  own  theory  of  interest,  the  "Positive  Theory 
of  Capital,"  however,  calls  for  a  more  extended  consideration, 

190,  Calvin's  and  Turgot's  Explanation  of  Interest. — It 

was  during  the  time  of  the  Reformation,  when  so  many  con- 
ceptions of  ethics  were  revolutionized,  that  the  reformer  John 


See  list   of  authors   quoted. 


190]  CAPITAL  GOODS  AND  RETURNS  243 

Calvin,  opposing  the  orthodox  doctrine  that  usiiiy  should  be 
forbidden,  defended  the  interest  of  money  on  the  ground  that 
such  interest  is  paid  because  with  the  borrowed  money  may  be 
bought  a  house  or  a  field  from  which  profits  can  be  derived 
(204,  237).  Thus  he  sought  to  explain  the  interest  command- 
ing power  of  money  by  citing  the  rent  yielding  power  of  a 
house  or  a  piece  of  ground.  This  reasoning  has  since  been 
accepted  as  conclusive  without  ever  being  subjected  to  a 
critical  scrutiny. 

Later,  in  the  eighteenth  century,  Turgot,  a  prominent  ex- 
ponent of  the  physiocratic  school  of  political  economy,  adopted 
practically  the  same  line  of  reasoning  in  an  effort  to  explain 
the  interest  commanding  power  of  capital.  He  observed  that 
capital  may  be  invested  either  in  land  or  in  industrial  or  com- 
mercial pursuits.  "When  invested  in  land  it  returns  rent ; 
hence  nobody  would  make  industrial  or  commercial  invest- 
ments if  these  would  not  also  bring  profitable  returns  (205). 
He  thus  sought  to  trace  the  capability  of  capital  goods  to 
yield  an  income  to  the  like  capability  of  land  to  return  rent. 

But  this  method  of  reasoning  does  not  clear  up  the  cause 
of  interest.  Two  things  will  be  exchanged  only  if  both  pos- 
sess certain  qualities  which  the  parties  to  the  exchange  regard 
as  equivalent.  These  qualities  must  be  possessed  by  the 
things  before  the  parties  will  even  consider  an  exchange.  The 
exchange  may  therefore  be  accepted  as  evidence  that  the  two 
things  have  equivalent  qualities,  but  does  not  explain  why  it  is 
that  these  qualities  are  possessed  by  the  objects  of  the  ex- 
change. The  money  on  the  one  hand  and  the  house  or  field  ol' 
Calvin  on  the  other  were  exchangeable  for  the  reason  that  each 
possessed  the  power  of  bringing  a  revenue  (181),  but  the 
I)Ower  of  money  to  bring  a  revenue  is  not  a  result  of  the  fact 
that  money  is  exchangeable  for  land.  The  exchangeability  is 
only  a  manifestation  of  the  fact  that  both  money  and  laud 
have  this  power,  but  does  not  explain  the  why  and  wherefore. 
The  same  objection  holds  good  against  Turgot 's  argument, 
inasmuch  as  the  interchangeability  of  land  and  capital  goods 
as  invfs1m*nts  is  accepted  as  a  premise. 


244  DISTRIBUTION  OF  WEALTH  [loi 

191.  The  Productivity  Theory  of  Interest. — The  most 
prevalent  way  of  accounting  for  capital  returns  is  to  accredit 
capital  goods  with  the  faculty  of  assisting  labor.  It  is  held 
that  capital,  by  assisting  labor,  earns  interest  for  its  owner. 

This  theory  receives  wide  acceptance  because,  at  first 
sight,  it  appears  to  agree  with  facts  and  seems  very  plaus- 
ible. Yet,  on  closer  examination,  it  proves  unsatisfactory. 
Many  facts  are  distinctly  out  of  harmony  with  this  proposi- 
tion. Capital  goods  which  return  profits  consist  not  only  of 
means  of  production,  but  also  of  the  goods  which  are  being 
forwarded  to  maturity  (186).  A  productive  faculty  might 
apparently  be  imputed  to  means  of  production,  like  looms  or 
other  tools,  but  certainly  not  to  the  goods  in  process  of  pro- 
duction, like  yarns  that  are  being  woven  into  cloth.  It  cannot 
be  said  of  yarns  that  they  assist  the  workman  to  weave  cloth, 
nor  can  it  be  said  that  by  the  use  of  yarns  the  making  of  cloth 
is  facilitated,  so  that  he  who  furnishes  the  yams  should 
obtain  more  than  their  value  by  reason  of  the  assistance  which 
the  yarns  render  in  the  making  of  the  cloth.  Yet  we  know 
from  experience  that  profits  accrvie  alike  to  means  of  pro- 
duction and  to  the  goods  in  course  of  production.  An  ex- 
planation of  capital  returns,  to  be  really  valid,  must  be  ap- 
plicable to  all  foi-ms  of  capital  goods  that  actually  return 
profits  in  the  nature  of  interest. 

We  have  already  seen  (132)  that  capital  goods  are  im- 
mature products,  the  embodiment  of  past  labor,  to  be  utilized 
through  future  labor  in  the  production  of  mature  goods,  and 
that  the  efficiency  of  modem  methods  of  production  is  due  to 
the  use  of  preceding  inventions  and  discoveries.  The  in- 
creased productivity  of  labor,  when  more  efficient  and  in- 
cidentally more  complex  methods  of  production  are  employed, 
is  usually  accredited  to  the  greater  amount  of  capital  employed. 
But  it  is  by  no  means  clear  why  this  credit  should  not  be 
given  to  progressive  invention  and  improvements  in  methods 
of  production.  The  claim  that  capital  is  producing  this  effi- 
ciency, or  at  least  helping  to  produce  it,  requires  to  be 
examined. 


192]  CAPITAL  GOODS  AND  RETURNS  245 

192.  Analysis  of  the  Productivity  Theory, — Let  us  assume 
that  by  a  newly  invented  machine  the  cost  of  manufacturing 
stockings  is  materially  reduced.  AVhile  the  inventor  holds  a 
patent,  he  is  able,  by  making  such  machines  and  renting  them 
out,  to  obtain  an  income  proportionate  to  the  benefit  his  in- 
vention bestows.  But  this  is  changed  when  the  patent  expires, 
and  the  right  to  make  and  sell  similar  machines  becomes  public 
property.  The  manufacturers  then  buy  machines  instead  of 
renting  them,  and  at  first  they  make  a  handsome  profit,  since 
they  need  no  longer  pay  royalty  for  the  use  of  the  machines. 
However,  the  lucrative  trade  of  making  stockings  attracts  other 
manufacturers,  and  the  increased  output  of  these  goods  lowers 
the  price,  so  that  the  consumers  reap  more  and  more  of  the 
benefit  of  the  invention.  This  process  takes  place  gradually. 
The  profits  obtained  through  the  use  of  the  machines  gradually 
shrink  as  more  machines  are  brought  into  use,  and  the  price 
of  their  output  is  reduced.  The  question  now  arises,  at  what 
point  will  this  process  come  to  an  end  ? 

It  is  obvious  that  more  capital  will  be  invested  in  such 
machines  so  long  as  the  profits  that  can  be  derived  from  their 
use  exceeds  the  profits  which  capital  invested  otherwise  usually 
brings;  hence  the  increase  of  those  machines  will  cease  when 
profits  on  capital  invested  in  them  fall  to  the  current  rate  of 
capital  returns. 

Thus,  if  capital  otherwise  invested  did  not  have  the  power 
to  yield  an  income,  the  number  of  these  machines  would  be 
increased  until  the  income  on  their  use  is  reduced  to  the  level 
of  what  other  capital  yields,  namely  to  nil.  We  must  there- 
fore conclude  that  capital  invested  in  these  machines  con- 
tinues to  return  interest,  not  because  the  machines  reduce  the 
cost  of  production,  but  because  other  investments  afford  capital 
interest.  The  productivity  theory  of  interest  simply  assumes 
the  very  thing  which  it  undertakes  to  explain,  namely  that  in- 
vested capital  affords  a  profit  in  the  form  of  interest.  The 
question  as  to  ivlnj  capital  brings  an  income  is  not  answered 
(243a). 

According  to  our  former  study  (140)  one  of  the  cff'ects  of 
competition    is   that  of  conferring   upon   Ihc   consumers  all 


246  DISTRIBUTION  OF  WEALTH  Ii9i 

benefits  arising  from  improvements  in  methods  of  production. 
But  according  to  the  productivity  theory  of  interest  this  is 
only  partly  true,  for  it  is  claimed  that  a  portion  of  this  benefit 
rightfully  belongs  and  naturally  goes  to  capital  (243&).  If 
the  productivity  theory  were  correct,  it  should  be  possible  to 
point  out  the  economic  force  which  defeats  the  fundamental 
law  of  competition. 

The  endeavor  of  the  French  economist  Bastiat  to  explain 
why  it  is  that  interest  accrues  to  capital  has  the  same  short- 
coming. This  writer  illustrates  his  argument  by  the  case  of 
James  who  has  made  a  plane  which  he  loans  to  William  for  a 
year,  to  be  used  in  planing  planks.  At  the  end  of  the  year  the 
plane  is  worn  out,  and  William  makes  a  new  one  which  he 
hands  over  to  James  in  return  for  his  loan,  and  with  it  he 
gives  him  a  plank  to  pay  for  the  advantage  which  the  plane 
afforded. 

Whatever  it  may  have  been  that  induced  William  to  agree 
to  pay  a  plank  as  interest,  an  isolated  case  cannot  establish  the 
rule  on  which  the  power  of  capital  is  based.  William  would 
certainly  not  agree  to  borrow  the  plane  of  James  on  condition 
of  paying  a  plank,  if  John,  another  carpenter — who  had  needed 
for  his  own  work  a  plane  that  would  last  him  a  year,  but  had 
made  two,  because  he  could  make  these  in  less  than  double  the 
time  required  to  make  one — were  to  offer  the  loan  of  his  second 
plane  to  William  on  condition  of  getting  back  a  new  and 
equally  good  one  at  the  end  of  a  year  and  only  half  a  plank 
for  the  use  of  the  one  loaned.  Suppose,  furthermore,  that 
there  were  yet  others  besides  John  who  had  made  more  planes 
than  they  had  immediate  use  for.  It  is  then  quite  conceivable 
that  in  view  of  saving  the  trouble  of  their  storing  and  the  risk 
of  their  shrinking  or  cracking  or  of  their  being  stolen,  com- 
petition will  bring  down  the  recompense  for  lending  planes  to 
the  point  of  merely  a  return  of  a  new  plane  in  the  place  of  the 
one  loaned.  The  examination  of  the  case  must  evidently  be 
extended  to  the  general  market  by  assuming  that  the  lending 
of  planes  is  a  business  which  some  of  the  plane  makers  carry 
on  in  addition  to  making  and  selling  planes. 

So  long  as  capital  invested  in  the  lending  of  planes  brings 


193]  CAPITAL  GOODS  AND  RETURNS  247 

an  income  exceeding  the  return  of  capital  invested  otherwise, 
the  number  of  plane  lenders  increases,  and  through  compe- 
tition the  hire  of  planes  comes  down.  On  the  other  hand, 
when  these  profits  are  below  the  current  rate  of  returns  from 
other  fonns  of  capital,  the  plane  makers  prefer  to  sell  the 
planes  and  to  invest  the  money  received  in  some  other  way, 
until  the  hire  of  planes  rises  again  by  reason  of  the  lessening 
competition  among  plane  lenders.  In  the  end  the  profits  from 
lending  planes  adjust  themselves  to  the  current  rate  of  profits 
commanded  by  capital  generally. 

It  is  thus  apparent  that  Bastiat's  illustration  can  account 
for  the  willingness  of  "William  to  pay  a  plank  for  the  loan  of 
the  plane  only  by  assuming  that  capital  generally  has  the 
power  to  command  interest,  and  since  it  is  wrong  to  assimie 
that  which  is  to  be  proven,  it  follows  that  Bastiat's  illustration 
fails  to  explain  interest. 

193.  Interest  Ascribed  to  Nature's  Reproductive  Powers. 
— The  reproductive  powers  of  live  stock  have  furnished  a 
favorite  argument  in  accounting  for  interest.  Thus  Jeremy 
Bentham,  in  criticising  Aristotle,  who  condemns  interest  on 
the  ground  that  "all  money  is  in  its  nature  barren,"  argues 
that: 

A  consideration  that  did  not  happen  to  present  itself  to  that  great 
philosopher,  but  which,  had  it  happened  to  present  itself,  might  not 
have  been  altogether  unworthy  of  his  notice,  is,  that  though  a  daric 
would  not  beget  another  daric,  any  more  than  it  would  a  ram,  or  an 
ewe,  yet  for  a  daric  which  a  man  borrowed  he  might  get  a  ram  and  a 
couple  of  ewes,  and  that  the  ewes,  were  the  ram  left  with  them  a  cer- 
tain time,  would  probably  not  be  barren.  Tiiat  then  at  the  end  of  the 
year,  he  would  find  himself  master  of  his  tliree  sheep,  together  with  two, 
if  not  three,  lambs;  and  that,  if  he  sold  his  sheep  again  to  pay  back 
his  daric,  and  gave  one  of  his  lambs  for  the  use  of  it  in  the  mean  time, 
he  would  be  two  Iambs,  or  at  least  one  lamb,  richer  than  if  he  liad  made 
no  Buch  bargain." 

Bentham 's  illustration  concedes  on  the  one  hand  that  money 
is  barren  and  implies,  on  the  other,  that  the  income  accruing 
from  the  vital  power  of  the  sheep  is  in  the  nature  of  interest. 

"'  Bentham,  letter  x,  p.  101. 


248  DISTRIBUTION  OF  WEALTH  [194 

Yet  we  are  told  that  the  owner  of  sheep  sells  them  for  a  daric. 
This  assumption  is  not  consistent  with  the  premises,  for  no 
one  who  has  a  goose  that  lays  golden  eggs  will  give  it  in  ex- 
change for  a  common  goose.  From  the  premises  it  would 
follow  that  the  seller  of  the  sheep,  at  the  end  of  the  year,  would 
be  two  lambs,  or  at  least  one  lamb,  poorer  than  he  would  have 
been,  had  he  not  made  that  bargain.  It  cannot  be  assiuned 
that  the  seller  of  the  sheep  was  a  fool.  There  must  be  some 
flaw  in  Bentham's  argument,  for  the  sellers  of  sheep  are,  as 
a  rule,  as  shrewd  as  the  buyers.  The  fault  is  obviously  in  one 
of  the  premises.  The  housing,  feeding  and  raising  of  the  sheep 
and  lambs  require  labor  which  the  seller  of  the  sheep  desires 
to  avoid,  and  without  the  performance  of  which  the  buyer  of 
the  sheep  could  not  become  the  owner  of  the  lambs;  and 
under  free  competition  the  value  of  the  accrued  lambs  would 
adjust  itself  to  correspond  with  the  value  of  this  labor.  The 
value  of  the  lambs  would  therefore  represent  ivages  and  not 
interest,  and  Bentham  's  logic  falls  to  the  ground.*^^ 

194.  Interest  Theory  of  Henry  George. — No  more  con- 
clusive than  the  foregoing  is  the  theory  of  Henry  George, 
according  to  whom : 

Interest  springs  from  the  power  of  increase  which  the  reproductive 
forces  of  nature,  and  tiie  in  effect  analogous  capacity  for  exchange, 
give  to  capital.^ 

In  this  statement  the  author  refers  to  forces  of  nature  which 
are  accessible  to  all  who  choose  to  avail  themselves  of  their 
benefit,  for  in  another  passage  he  speaks  of  them  as  being 
available  at  the  margin  of  cultivation.  If  they  were  in  some 
way  limited  and  available  only  on  intra-marginal  land,  the 
income  they  render  would  come  under  the  head  of  reiit,  not  of 
interest.  On  the  other  hand,  those  forces  of  nature  which  are 
available  without  hindrance  cannot  be  monopolized  and  can- 
not, therefore,  have  any  value,  and  having  no  value,  the  value 
of  that  which  is  produced  by  their  aid  cannot  exceed  the  value 
of  the  efforts  necessary  to  utilize  the  forces.  This  value  is 
wages,  not  rent  nor  interest.    It  is  manifest,  on  examination, 

^'  Cf.  Bilgram,  pp.  83  ff.  ''  George,  p.  138. 


195]  CAPITAL  GOODS  AND  RETURNS  249 

that  the  theory  of  interest  advanced  by  Henry  George  is  based 
upon  a  confusion  of  the  premises. 

195.  Inception  of  the  "  Abstinence  "  Theory  of  Interest. 

— The  abstinence  theory  has  really  been  evolved  from  the 
doctrine  that  interest  depends  upon  the  supply  and  demand  of 
capital  goods.    According  to  Ricardo : 

The  rate  of  interest  is  not  regulated  by  the  abundance  or  scarcity 
of  money,  but  by  the  abundance  or  scarcity  of  that  part  of  capital  not 
consisting  of  money." 

This  statement  implies  that  labor  employed  in  conjunction 
with  capital  is  below  its  maximum  efficiency  because  the 
available  amount  of  capital  is  limited  (162,  214,  242,  316). 
An  increase  of  capital  would,  accordingly,  enhance  labor's 
productivity  and  at  the  same  time  reduce  the  interest  rate. 
This  phase  of  the  subject  has  been  fully  discussed  before 
(157-161)  and  graphically  illustrated  in  Figs,  14-19.  Let  us 
analyze  Ricardo 's  idea  more  fully. 

If  OC"  of  Fig.  18  represents  the  available  amount  of 
capital,  then  C"e"  represents  its  final  efficienc}^  01  the  rate  of 
interest,  the  area  OC"e"E  the  corresponding  output  of  the 
labor  employed,  and  the  area  OC"e"l  that  portion  of  the  out- 
put which  goes  to  the  capital  OC"  as  interest.  Let  us  sup- 
pose that  the  ordinate  01  represents  a  rate  of  interest — pure 
interest — of  4  per  cent.  If  now  the  capital  were  increased  by 
C"'C",  the  output  of  the  same  labor  would  be  increased  by  the 
area  C'C'e'e",  and  the  rate  of  interest  would  be  reduced  to  Oi, 
say,  2  per  cent.  But  according  to  Ricardo 's  assumption  this 
additional  output  is  not  sufficient  to  induce  the  production  and 
employment  of  the  additional  capital  C"C',  for  it  is  plain  that 
if  an  additional  supply  of  capital  were  forthcoming,  the  rate 
of  4  per  cent,  could  not  be  maintained,  and  interest  would  fall. 
The  question  thus  arises,  why  is  it  that  the  production  and 
employment  of  capital  does  not  go  beyond  the  point  where 
capital  brings  the  current  rate  of  interest?  This  line  of  in- 
quiry points  to  the  existence  of  some  impediment  to  the  pro- 

"  Ricardo,  p.  284. 


250  DISTRIBUTION  OF  WEALTH  [196 

duetion  of  capital,  and  this  impediment  is  currently  considered 
to  be  of  a  psj'chological  nature. 

196.  Senior's  Abstinence  Theory. — The  above  idea  made 
its  appearance  among  the  earlier  writers  who  held  that  men 
would  have  no  inducement  to  produce  and  invest  capital  if 
there  were  no  adequate  reward  for  their  doing  so.  It  would 
thus  follow  that  interest  is  necessary  as  an  incentive  to  in- 
dustrial progress.  Senior  was  the  first  to  formulate  this 
view  into  a  definite  theory.  He  attributed  to  man  an  inborn 
reluctance  to  save,  a  trait  analogous  to  the  reluctance  to  work. 
Just  as  the  disinclination  to  perform  work  is  overcome  by  the 
prospective  value  of  the  product,  so  is  the  reluctance  to  save 
overcome  by  the  anticipated  interest  accruing  for  deferring  the 
enjoyment  of  past  productions  to  a  later  time.  The  service  for 
which  interest  is  the  natural  recompense  is  '  *  abstinence, ' '  ®^ 
just  as  labor  is  the  service  for  which  wages  are  paid  (242). 
This  reluctance  to  save  is  supposed  to  fully  account  for  that 
scarcity  of  capital  through  which  interest  can  be  explained. 

This  theory  was  by  many  considered  conclusive,  but  its 
weakness  has  been  recognized  by  a  gradually  increasing 
niunber  of  students.  The  assumption  that  wealth  will  not  be 
produced  and  saved  for  further  use  in  production,  unless  the 
"abstinence"  involved  in  such  use  of  wealth  obtains  com- 
pensation in  some  form,  is  wholly  inconsistent  with  the  fact 
that  there  are  times  when  the  market  supply  of  products  of 
all  kinds  is  so  much  greater  than  the  demand  that  this  con- 
dition is  generally  regarded  as  due  to  "overproduction." 
Moreover,  there  are  other  inducements  besides  interest  for 
saving  and  investing  capital  which  can  account  for  all  the 
capital  now  extant  (318).  A  re-statement  of  the  abstinence 
theory  appeared  to  be  necessary  to  save  it  from  being  totally 
discredited  by  the  accumulating  objections,  and  this  was  pre- 

^  It  is  obvious  that  abstinence,  in  this  sense,  is  a  misnomer,  since 
the  saver  of  wealth  who  permits  it  to  be  used  by  a  productive  group 
does  not  really  abstain,  that  is,  relinquish  the  enjoyment  of  his  accumu- 
lated wealth;  he  merely  defers  its  use  for  gratifying  his  own  desires. 
For  this  reason  the  term  "  waiting "  has  been  used  instead  by  many 
modern  Avriters. 


197]  CAPITAL  GOODS  AND  RETURNS  251 

sented  by  Bohm-Bawerk  in  his  "Positive  Theoiy  of  Capital."  ^° 
In  this  theoiy  the  negative  concept  "abstinence"  is  replaced, 
as  a  fundamental  premise,  by  the  positive  idea  "evaluation," 
and  particularly,  the  difference  of  evaluation  of  present  as 
compared  with  future  benefit. 

As  this  is  by  far  the  best  presentation,  the  abstinence 
theory  must  stand  or  fall  with  it.  We  shall  therefore  subject 
only  this  latest  statement  of  the  theory  to  a  critical  examina- 
tion, preceded  by  a  brief  summary  of  the  same.^^ 

197.  Bohm-Bawerk's  Theory  of  Interest. — The  "Positive 
Theory ' '  is  based  on  the  postulate  that : 

Present  goods  ai'e,  as  a  rule,  worth  more  than  future  goods  of  like 
kind  and  number.*^ 

In  this  postulate  the  term  "present  goods"  means  goods 
ready  for  immediate  consumption,  and  also  money  in  hand. 
Among  "future  goods"  are  included  not  only  goods  and 
money  receivable  in  the  future,  but  also  goods  in  hand  which 
are  not  yet  adapted  for  consumption,  namely  capital  goods. 

The  dift'erence  in  the  evaluation  or  rating  of  present  as 
against  future  goods  is  regarded  as  being  the  combined  effect 
of  a  series  of  causes  which,  though  of  dift'erent  nature,  exert 
their  influence  in  the  same  direction.  Three  principal  causes 
are  enumerated.  The  first  consists  of  the  difference  of  the 
relation  of  demand  and  supply  at  different  periods.^"  This 
may  be  exemplified  in  the  case  of  a  farmer  who  has  lost  his 
crop  and  needs  immediate  relief,  or  in  the  case  of,  say,  a 
young  physician  who  is  in  need  of  means  for  his  establishment 
and  looks  forward  with  confidence  to  his  more  prosperous 
future.  In  such  cases  it  is  less  hardship  to  return  a  greater 
value  in  the  future  than  to  suffer  for  the  want  of  a  lesser 


"  See  list  of  authors  quoted. 

"The  jirf^iinicnt  liere  adduoeil  is  tlie  same  as  tliat  presented  under 
the  title:  "Analysis  of  tlie  Nature  of  Capital  and  Interest,"  by  H. 
Hilgrani,  .Journal  of  Political  Kconomy,  March,  1008. 

"  IS.llim-JJawerk,  11,  p.  237  (248).  Numbers  iu  parentheses  refer  to 
tlic  German  edition. 

•'^Ihid.,  pp.  249  (202)  ff. 


g52  DISTRIBUTION  OF  WEALTH  [197 

value  at  present.  The  second  cause  adduced  is  of  a  purely 
psychological  nature,  namely  the  propensity  of  man  to  under- 
rate future  pleasure  and  pain  simply  because  they  are  remote 
(242).'"  The  postulate  put  forth  as  the  third  cause  '^  is  really 
an  elaboration  of  the  first  and  second  causes  in  their  relation 
to  the  proposition  that 

the  roundabout  ways  of  capital  are  fruitful  but  long," 

in  the  sense  that  the  time  intervening  between  an  effort  of 
production  and  the  realization  of  the  utilities  resulting  from 
the  effort  increases  with  the  adoption  of  more  complex  though 
at  the  same  time  more  efficient  processes  of  production.  Thus, 
if  an  employer  has  at  his  disposal,  say,  one  month's  labor,  in 
other  words,  so  much  capital,  he  may  proceed  to  employ  it 
with  greater  or  less  efficiency,  according  as  he  selects  a  more 
or  less  complex  system  of  production.  If  he  wants  "present 
goods"  quickly,  he  obtains  less  goods  from  the  same  amount 
of  capital  by  the  use  of  simple  methods  of  production  than  if 
he  chooses  a  more  efficient  method  that  yields  the  finished 
products  after  a  longer  interval.  The  amount  of  goods  obtain- 
able from  a  given  quantity  of  capital  with  a  more  complex 
and  protracted  method  of  production  is  therefore  in  the  end 
greater  than  with  a  simpler  and  quicker  one. 

It  is  pointed  out,  however,  that  the  greater  quantiiy  of 
goods  obtainable  by  a  more  complex  method,  but  only  after  a 
greater  interval  of  time,  has  not  a  correspondingly  greater 
present  value,  because  future  goods  are  underrated  in  com- 
parison with  present  goods.  As  the  lapse  of  time  involved 
in  the  use  of  more  complex  methods  of  production  becomes 
greater,  there  is  a  point  of  diminishing  returns  beyond  which 
the  gain  due  to  the  increase  of  the  products  is  overbalanced 
by  the  underrating  of  the  value  on  account  of  the  greater 
lapse  of  time  required  for  the  production. 

In  comparing  different  methods  of  gradually  increasing 
complexity  and  corresponding  delay,  it  will  be  seen  that  the 
present  value  of  the  future  products  into  which  a  given  amount 

'"  Bohm-Bawerk,  II,  pp.  253  (2G6)  ff.  "^  Ibid.,  pp.  260  (273)  ff. 

"76R,  p.  82  (87). 


197]  CAPITAL  GOODS  AND  RETURNS  253 

of  capital  goods  is  finally  converted  reaches  a  maximimi  at  the 
point  of  diminishing  returns.  This  highest  present  evalua- 
tion of  the  future  products  determines  the  value  of  the 
capital  goods.  According  to  this  theory  the  present  value  of 
capital  goods  equals  the  discounted  or  underrated  value  of  the 
final  product  obtainable  from  the  capital  (198),  always  assum- 
ing, of  course,  that  this  latter  is  being  employed  in  the  most 
advantageous  way. 

Upon  these  propositions  Bolun-Bawerk  bases  his  theory 
of  interest.  His  conclusions  are  summarized  under  three  heads, 
the  first  relating  to  the  subject  of  loans  and  interest  on  loans ; 
the  second  to  emploj^ed  capital  goods  and  the  returns  there- 
from ;  and  the  third  to  interest  derived  from  enduring  goods, 
such  as  means  of  production  in  general,  the  treatment  under 
this  head  being  little  more  than  an  elaboration  of  the  discourse 
under  the  second  heading. 

A  loan  is  viewed  as  an  exchange  of  present  for  future  goods.'^^ 
The  lender  gives  a  present  sum  of  money  in  exchange  for  a 
future  sum.  But  money  receivable  at  a  future  time  being 
underrated  as  compared  with  the  same  amount  in  the  present, 
it  follows  that  a  future  sum  of  money,  in  order  that  it  shall 
have  a  value  equal  to  the  present  sum,  must  be  greater  in 
amount.  In  giving  a  greater  amount  of  future  money  in  ex- 
change for  a  lesser  amount  of  present  money,  the  borrower 
gives  equivalent  for  equivalent ;  and  when  the  future  becomes 
present  and  the  debt  becomes  due,  the  debtor  pays  the  greater 
amount  in  cancelling  the  debt.  Where  the  loan  is  absolutely 
secure  and  all  charges  for  risk  and  supervision  are  eliminated, 
the  excess  of  the  amount  ultimately  returned  by  the  borrower 
over  the  amount  originally  advanced  by  the  lender  is  "in- 
terest. ' ' 

The  potential  utility  of  capital  goods,  like  that  of  machinery 
that  wears  out,  or  like  that  of  material  that  is  used  up  in  course 
of  production  and  incorporated  in  the  goods  produced,  is  to 
be  regarded  as  having  entered,  through  a  process  of  economic 
metamorphosis,  into  the  final  products  and  as  composing  the 

"  li.ihni-I'.awerk,  II,  pp.  28.-)   (290)   ff. 


254  DISTRIBUTION  OF  WEALTH  [197 

utility  of  the  consimiptiou  goods  (10).  The  consumption  goods 
must  accordingly  be  considered  as  an  aggregation  of  the 
several  different  kinds  of  capital  which,  in  their  matured  and 
assimilated  form,  have  entered  into  the  aggregation.  The 
value  of  the  aggregation  is  due  to  its  final  utility,  and  the 
value  of  each  of  its  components  is  a  part  of  the  aggregate  value. 

According  to  the  undervaluation  theory  the  value  of  any 
capital  good  depends  upon  the  value  of  its  respective  part  of 
the  final  product,  and  this  being  a  future  value,  its  under- 
valued or  discounted  amount  is  the  present  value  of  the  capital 
good. 

While  capital  is  being  forwarded  and  converted  from  its 
present  form  into  its  final  condition  as  part  of  the  final 
product,  its  present  value — the  discounted  future  value — 
grows  to  full  rate,  and  the  increase  constitutes  the  interest 
that  accrues  to  capital.'^*  It  goes  without  saying  that  this 
increase  in  the  value  occurs  only  while  the  capital  is  being 
advanced  toward  its  final  stage,  that  is,  while  being  utilized  in 
production.  While  capital  lies  idle,  while  its  latent  utilities 
remain  in  statu  quo,  interest  cannot  arise.'^^ 

This  is  in  substance  the  reasoning  through  which  Bohm- 
Bawerk  explains  interest,  but  it  is  clear  that  his  theory 
does  not  differ  essentially  from  Senior's  Abstinence  Theory. 
Senior  proceeds  on  the  proposition  that  the  owner  of  goods 
available  at  present  is  averse  to  defer  their  consumption — to 
"abstain"  or  "wait" — and  when  he  does  so  for  the  benefit  of 
others,  he  is  entitled  to  compensation  for  so  doing.  Bohm- 
Bawerk  proceeds  on  the  proposition  that  goods  available  in 
the  future  are  evaluated  lower  than  the  same  amount  of 
goods  available  now.  Since  it  is  obvious  that  the  giving  of 
one  thing  of  value  for  another  thing  of  less  value  involves  a 
sacrifice  and  is  contrary  to  human  nature,  it  follows  that  both 
these  propositions  are  merely  different  ways  of  expressing  the 
same  fundamental  thought.  Hence  the  "Positive  Theory" 
cannot  be  valid  if  the  ' '  Abstinence  Theory ' '  is  untenable,  and 
that  the  positive  as  w^ell  as  the  negative  form  of  the  proposition 
is  open  to  question  will  appear  from  the  following. 

''*Uf.  Bohm-Bawerk,  II,  pp.  302  (318)  ff.      "  t'f .  ibid.,  p.  303  (319). 


198]  CAPITAL  GOODS  AND  RETURNS  ^55 

198.  Utility  Theory  of  the  Value  of  Capital  Goods. — As 
we  have  just  seen,  the  faculty  of  employed  capital  goods  to 
return  interest  is  explained  on  the  basis  of  two  assumptions : 
(1)  that  future  goods  are  evaluated  at  less  than  present  goods 
of  like  kind  and  number,  and  (2)  that  the  value  of  capital 
goods  depends  on  the  value  of  the  final  consumption  goods 
into  which  they  become  converted  through  productive  processes. 

Consumable  goods  are  produced  through  a  number  of  con- 
secutive and  collateral  processes,  in  each  of  which  a  certain 
amount  of  capital  is  contributed  to  their  existence.  The  goods 
are  accordingly  the  aggregation  of  all  these  several  amounts 
of  capital  in  assimilated  form. 

The  number  of  operations  necessary  to  produce  consump- 
tion goods  is,  as  a  rule,  indefinite,  but  in  order  to  present  a 
concrete  illustration,  let  us  assume  that  the  making  of  coats, 
for  example,  requires  but  four,  namely  those  performed  (1) 
by  the  machinist,  making  looms,  (2)  by  the  spinner  in  making 
yarns,  (3)  by  the  weaver,  turning  yams  into  cloth,  and  (4) 
by  the  tailor,  making  the  cloth  into  coats  and  selling  them. 
The  product  of  each  operation  is  regarded  as  so  much  capital. 
We  may  suppose,  for  the  sake  of  argument,  that,  out  of  100 
coats,  4  are  to  be  credited  to  the  capital  "loom,"  30  to  the 
capital  "yarns,"  26  to  the  capital  "weaver's  effort,"  and  40 
to  the  capital  "tailor's  effort." 

Taking  these  proportions  as  a  basis,  the  share  of  the  final 
product  to  be  credited  to  a  loom  on  which  the  cloth  for  20,000 
coats,  each  worth  $10,  can  be  woven,  amounts  to  4  per  cent,  of 
the  total  number,  namely  800  coats,  and  the  value  of  this  share 
is  $8000. 

But  since  the  life  of  a  loom  is,  say,  12  years,  and  the  con- 
version of  the  loom  into  cloth,  and  ultimately  into  coats,  takes 
place  gradually,  the  purchaser  of  a  loom  can  i-ealize  its  proper 
share  only  in  instalments  during  a  gradually  increasing 
period,  the  average  of  which  is  6  years.  According  to  the 
utility  theory,  the  value  of  the  loom  to  the  weaver  })ecomes 
determined  as  follows.  The  value  of  the  final  pi'oducts  into 
which  the  loom  can  be  converted  is  .$8000.  But  as  this  value 
can  be  realized  only  in  the  future,  after  an  average  jieriod  of 
G  years,  the  sum  of  $8000,  G  years  hence,  is  estimated  by  the 


256  DISTRIBUTION  OF  WEALTH  [i98 

weaver  at  a  present  value  of  only  about  $6000.  Hence  the 
value  of  the  loom,  and  accordingly  the  machinist's  share  for 
making  it,  would  be  $6000.'^« 

But  now  comes  the  question  which  the  utility  theory  leaves 
unanswered.  How  is  the  user  of  capital  goods,  through  whose 
efforts  they  are  forwarded  toward  their  final  condition,  to 
know  what  fraction  of  the  total  value  of  the  consumption 
goods  that  will  ultimately  be  obtained  is  really  to  be  credited 
to  the  one  and  to  the  other  of  the  several  different  kinds  of 
capital  that  are  being  used  up  in  making  the  product?  In 
other  words,  what  share  of  the  total  number  of  coats  is  due 
to  the  loom,  what  share  to  the  yarns,  and  to  the  capital  pro- 
duced by  the  weaver's  effort,  and  to  that  produced  by  the 
tailor's?  The  weaver,  when  he  comes  to  buy  a  loom,  knows 
from  experience  that  a  loom  is  good  for  12  years'  use  and  that 
in  using  it  up  the  cloth  woven  on  it  will  be  enough  to  make 
20,000  coats,  each  worth  $10  when  finished.  But  how  is  he  to 
know  that  the  part  which  the  loom  is  supposed  to  contribute 
to  the  ultimate  product  is  so  and  so  much?  The  determina- 
tion of  the  value  of  the  various  items  of  capital  making  up  the 
final  product  being  the  question  at  issue,  it  cannot  be  assumed 
that  the  value  of  any  one  of  these  items  is  already  known. 
While  the  share  of  the  coats  which  is  due  to  the  loom  has  here 
been  assumed  as  being  4  per  cent.,  there  is  nothing  to  show  how 
it  comes  to  be  that  percentage  or  any  other,  and  the  value  of 
the  product  into  which  the  loom  is  finally  converted  being  un- 
known, it  cannot  be  the  starting  point  in  the  determination  of 
the  value  of  the  loom  itself  (197).  It  follows  that  the  utility 
theory  of  value  is  inapplicable  to  capital  goods,  such  as  the 
loom  of  our  illustration,  for  if  the  weaver  has  no  means  of 
judging  what  portion  of  the  final  consimiption  goods  is  due 
to  the  use  of  the  loom,  he  cannot  gauge  the  future  utility  of 
the  loom,  nor  the  value  which,  when  discounted,  is  alleged  to 
be  the  value  of  the  loom. 

"  The  figures  here  used  are  only  for  the  purpose  of  illustration.  We 
have  assumed  that  only  four  instead  of  perhaps  a  hundred  different 
operations  go  to  the  making  of  the  coats,  hence  the  sum  credited  to  the 
loom  appears  abnormally  high. 


199]  CAPITAL  GOODS  AND  RETURNS  257 

While  final  utility  does  indeed  determine  the  value  of  coats, 
the  sharing  of  this  value  among  the  various  agents  that  co- 
operated in  their  production  can  be  determined  only  on  the 
basis  of  the  amount  of  effort  given  by  each  toward  the  attain- 
ment of  the  result.  In  the  determination  of  the  value  of 
capital  goods  effort,  or  cost,  is  as  much  an  essential  factor  as 
is  the  utility  of  the  final  product. 

199.  Time  Involved  in  Production  with  Capital. — One  of 
the  essential  premises  of  the  Positive  Theory  of  Capital,  as 
applied  to  ''enduring"  capital  goods,  is  the  assumption  that 
the  indirect  or  capitalistic  methods  of  production,  though  more 
efficient  than  the  primitive  methods,  take  more  time.  Actual 
facts  do  not  bear  out  this  assumption,  as  may  l)est  be  shown  by 
a  concrete  example. 

Let  us  compare  the  primitive  with  the  modern  method  of 
producing  knit  gloves  on  the  following  supposition. 

One  workman,  knitting  by  hand,  can  finish  one  glove  per 
hour,  or  10  per  day  (30).  The  modern  method  requires  a  set 
of  four  machines,  each  performing  a  different  operation. 
Four  workmen  can  make  these  machines  in  3  years  and  then, 
by  their  use,  can  finish  160  gloves  daily.  In  20  years  of  300 
working  days  each,  or  after  the  completion  of  960,000  gloves, 
that  is,  480,000  pairs,  these  machines  are  worn  out. 

The  modern  method  is  of  a  composite  nature.  The  first 
efforts  toward  the  making  of  the  gloves  are  applied  to  the 
building  of  the  machines,  which  latter  thereby  become  the 
embodiment  of  a  certain  part  of  the  labor  necessary  to  make 
glovas.  These  machines  represent  960,000  gloves  in  a  partly 
finished  state,  and  subsequent  efforts  of  a  different  nature  are 
required  for  finishing  the  product.  These  subsequent  efforts 
are  those  of  operating  the  machines,  whereby  the  finished  goods 
are  obtained.  The  first  one  of  the  gloves  will  be  finished 
after  the  expiration  of  3  years,  counting  from  the  beginning 
of  the  work ;  the  last  one  20  years  later,  namely  at  the  close  of 
the  twenty-third  year.  From  the  beginning  of  the  fourth  to 
the  close  of  the  twenty-third  year  the  production  of  finished 
gloves  will  keep  on  at  a  unifonn  pace,  hence  the  average  time 
17 


258  DISTRIBUTION  OF  WEALTH  [199 

elapsing  between  the  very  beginning  of  the  work  and  the  pro- 
duction of  completed  goods  is  13  years. 

How  does  this  contrast  with  the  primitive  method?  The 
same  four  men,  if  knitting  by  hand,  will  complete  4  gloves  in 
the  first  hour  and  will  then  begin  another  lot  of  4.  In  making 
each  glove  only  one  hour  will  elapse  between  the  beginning 
of  the  work  on  it  and  its  completion,  and  it  would  appear  that 
the  reasoning  of  the  ' '  Positive  Theory ' '  proceeds  on  the  basis  of 
a  comparison  of  this  period  with  the  average  time  of  13  years 
of  the  preceding  case. 

This  comparison,  however,  is  based  on  unequal  premises, 
as  the  time  of  making  4  gloves  cannot  reasonably  be  contrasted 
with  the  time  of  making  nearly  a  million.  The  four  machines 
embodied  part  of  the  labor  applied  toward  the  making  of 
960,000  gloves.  While  the  machines  were  being  made,  the 
work  of  producing  this  quantity  of  goods  was  being  uniformly 
advanced,  and  even  the  first  hour's  work  on  the  machines  was 
as  necessary  for  the  production  of  the  last  glove  as  it  was  for 
that  of  the  first  one.  To  make  the  comparison  reasonable,  it 
should  be  based  on  the  production  of  equal  quantities.  The 
period  of  13  years  is  the  average  interval  between  the  first 
effort  and  the  completion  of  960,000,  not  of  4  gloves.  To 
make  this  larger  number  by  the  primitive  method,  four  work- 
men would  have  to  work  80  years,  which  corresponds  with  an 
average  of  40  years  expiring  between  the  beginning  of  the 
work  of  making  this  number  and  the  producing  of  the  finished 
goods.  The  comparison,  then,  is  obviously  in  favor  of  the 
capitalistic  method,  in  the  proportion  of  13  years  to  40. 

At  the  same  time,  the  fact  must  be  admitted  that  at  the 
beginning  there  is  a  period  in  which  the  balance  is  in  favor  of 
the  primitive  method.  Should  two  groups,  each  consisting 
of  four  workmen,  begin  work  on  the  same  day,  one  group 
adopting  the  primitive,  the  other  the  capitalistic  method,  the 
first  group  would  at  once  come  into  possession  of  "present 
goods, ' '  while  the  second  group  would  not  have  a  single  glove 
finished  until  after  3  years  of  labor;  and  in  addition  to  this 
time,  one  year  more  would  be  required  by  the  second  group  to 
overtake  the  first.     But  thereafter  the  second  group  would 


199]  CAPITAL  GOODS  AND  RETURNS  259 

come  into  possession  of  present  goods  in  the  form  of  finished 
gloves  so  rapidly  that  the  first  group  would  be  left  far  behind. 
Even  if  a  second  period  of  3  years  were  spent  in  the  making 
of  another  set  of  machines  after  the  first  set  is  worn  out,  the 
second  group,  26  years  after  the  beginning  of  the  operation, 
would  still  have,  in  addition  to  the  new  machines,  an  excess  of 
648,000  gloves  over  the  production  of  the  group  that  had 
adopted  the  method  that  brings  first  results  quicker.  Both 
this  excess  and  the  new  machines  are  a  clear  gain,  in  quantity 
as  well  as  in  time,  resulting  from  the  adoption  of  the  capital- 
istic method  of  production.  After  the  expiration  of  that 
initial  period  of  4  years  the  second  group  will  never  again 
fall  behind  the  first,  but  will  forever  remain  far  ahead  in  the 
possession  of  ''present  goods"  which  will  be  forthcoming 
more  rapidly,  by  an  equal  expenditure  of  labor,  than  the 
first  group  can  ever  hope  for.  As  regards  the  production  of 
"present  goods,"  the  first  group  has  an  advantage  over  the 
second  only  for  a  few  years  after  the  first  introduction  of  the 
improved  method.  It  is  obvious  that  the  method  which  affords 
such  an  excess  of  products,  the  method  by  which  the  total 
time  for  completing  an  equal  quantity  of  goods  is  reduced 
from  80  to  23  years,  cannot  in  any  sense  be  considered  the 
more  time-consuming  one.  Instead  of  involving  sacrifice  of 
any  sort,  the  capitalistic  method  is  a  source  of  gain  in  time  as 
well  as  in  every  other  respect  after  once  the  initial  period  has 
been  passed.  Only  for  this  period  is  it  true  that  capitalistic 
methods  of  production  involve  a  sacrifice  in  time. 

It  is  to  be  observed  that  this  period  of  4  years  falls  within 
the  time  when  the  more  productive  method  displaces  the  less 
productive.  It  is  not  repeated  each  time  a  new  set  of  machines 
Ls  made,  for  the  excess  of  production  attained  through  the  use 
of  the  preceding  set  of  machines  far  more  than  covers  the 
loss  of  time  required  for  making  a  new  set.  The  period  dur- 
ing which  the  first  group  has  an  advantage  over  the  second 
is  not  a  concomitant  of  regular  capitalistic  production,  but 
attends  only  the  process  of  displacing  antiquated  by  improved 
processes  of  work. 

Were  a  comparison  made  between  two  capitalistic  methods, 


260  DISTRIBUTION  OF  WEALTH  [199 

of  whicli  one  is  more  productive  than  the  other  but  requires 
the  use  of  a  greater  amount  of  capital,  the  fonner,  after  the 
brief  period  of  waiting  incident  to  the  introduction  of  the 
more  productive  method,  would  be  found  to  be  the  quicker. 
It  can  therefore  be  definitely  asserted  that — barring  a  brief 
period  attending  the  change  from  a  less  to  a  more  efficient 
method — the  most  productive  method  is  by  all  rules  of  logic 
also  the  quickest.  Modem  methods,  instead  of  delaying  pro- 
duction, actually  hasten  the  same.  After  the  period  of  transi- 
tion is  past,  they  invariably  bring  "present  goods"  more 
rapidly  into  the  possession  of  the  producers  than  do  the  more 
primitive  methods. 

This  conclusion  can  be  further  confirmed.  Suppose  a 
community  which  follows  the  primitive  method  above  de- 
scribed has  on  hand  a  supply  of  gloves  meeting  the  demand 
for  one  year.  Under  these  conditions  it  is  immaterial,  whether 
each  glove  maker  continues  production  by  fully  completing 
one  piece  after  another,  or  by  simultaneously  advancing  his 
year's  product  of  3000  gloves,  forwarding  the  work  on  all 
from  stage  to  sta'ge,  so  that  he  will  have  at  any  time  the  com- 
plete number  of  partly  finished  instead  of  a  smaller  number 
of  finished  gloves  on  hand.  If  then  one  of  the  glove  makers, 
imbued  with  the  idea  that  present  goods  are  more  valuable 
than  future  goods,  were  to  complete  piece  after  piece,  he 
would  be  unable  to  score  any  gain  over  those  who  select  the 
method  of  simultaneous  production,  as  in  both  cases  it  takes 
3000  hours  to  make  as  many  gloves,  and  on  account  of  the 
stock  on  hand  the  demand  for  the  new  gloves  does  not  realize 
before  the  close  of  the  year.  But  when  the  mode  of  simul- 
taneous production  is  improved  through  the  introduction  of 
the  roundabout  or  capitalistic  method,  the  time  of  producing 
the  goods  is  invariably  reduced,  and  it  is  therefore  unreason- 
able to  ascribe  to  the  use  of  capital  the  supposed  disadvantage 
of  the  postponement  of  the  completion  of  "present  goods," 
which  is  really  due  to  the  use  of  the  simultaneous  method  of 
production.  It  is  the  simultaneous  and  not  the  capitalistic 
feature    which   gives  the  method  the   appearance   of  being 


200]  CAPITAL  GOODS  AND  RETURNS  261 

"long."  When  the  facts  are  correctly  analyzed,  they  show 
that  the  iTse  of  capital  invariably  hastens  production. 

This  is  in  direct  conflict  with  the  proposition  which  forms 
part  of  the  groundwork  of  the  "Positive  Theory,""^  It  is 
true,  a  group  employing  primitive  methods  can  realize  an 
income  on  the  sale  of  their  goods  from  the  start,  which  a 
group  introducing  a  capitalistic  method  cannot  do.  But  this 
latter  group  gains  a  greater  recompense  for  their  efforts  after 
a  short  initial  period.  This  greater  recompense  is  however 
wages  for  more  efficient  service  and  is  not  to  be  confounded 
with  capital  interest.  The  "Positive  Tlieoiy"  clearly  fails  to 
explain  the  power  of  capital  goods  to  return  "interest." 

200.  The  Value  of  Lending. — Nor  can  this  theory  be  ap- 
plied with  any  better  success  to  the  explanation  of  pure  in- 
terest on  money  loans.  The  discussion  of  money  interest 
should  properly  be  deferred  to  the  following  chapter,  but 
in  order  to  avoid  a  break  in  the  argument  it  is  advisable  to 
include  in  the  present  discussion  also  that  part  of  the  Positive 
Theory  which  relates  to  money  interest.  We  shall  therefore 
next  deal  with  the  proposition  that  a  loan  is  an  exchange  of 
present  for  future  goods  and  that  interest  accrues  to  the 
lender  because  present  goods  are  prized  higher  than  future 
goods. 

It  cannot  be  denied  that  it  is  in  human  nature  to  under- 
rate future  pleasure  and  pain.  There  are  not  a  few  who 
j>refer  present  goods  to  those  of  the  future  and  who  evince 
their  dislike  for  present  effort  by  putting  off  work  to  the  last 
moment. 

But  it  is  equally  true  that  there  are  others  who  prudently 
provide  for  the  exigencies  of  the  future.  They  recognize 
certain  definite  advantages  which  future  goods  have  for  them 
over  present  goods,  and  therefore  value  those  future  goods 

"  "  Tlie  disadvantage  connected  with  the  capitalist  method  of  pro- 
duttion  is  its  Kacrifice  of  time.  The  roundabout  ways  of  capital  are 
fruitful  hut  long;  they  procure  U3  mon.'  or  Ix'tter  consumption  goods, 
hut  only  at  a  later  period  of  time.  Tliis  proposition,  no  less  than  the 
former,  is  one  of  the  ground  jiillars  of  tiu;  tlieory  of  ca[)ital." — iit'lhm- 
Uawerk,  Jl,  p.  82  (87). 


262  DISTRIBUTION  OF  WEALTH  [200 

higher  than  the  present.  In  other  words,  they  save  present 
goods  for  future  use.  Of  their  own  accord  they  deprive  them- 
selves of  some  present  pleasures  in  order  to  provide  against 
possible  want  at  some  future  time.  The  question  therefore 
arises,  which  of  the  two  influences  is  the  greater  economic 
force  ? 

The  ' '  Positive  Theory ' '  is  founded  on  the  assumption  that 
the  under-estimation  of  future  pleasure  and  pain  as  compared 
with  the  present  is  the  dominant  propensity,  in  other  words, 
that  the  preference  of  immediate  over  deferred  consumption 
and  the  disposition  to  put  off  exertion  to  the  last  moment  pre- 
dominate. A  future  and  consequently  under-estimated  sum, 
to  be  equal  in  value  to  a  present  sum,  must  be  greater.  Hence 
he  who  gives  a  certain  present  sum  in  exchange  for  a  larger 
future  sum,  the  present  value  of  which  is  equal  to  that  given, 
and  ivaits  for  the  larger  future  sum  to  become  present,  gains 
the  excess,  which  is  interest.  It  is  therefore  altogether  appro- 
priate to  designate  the  service  given  by  the  lender  as  "wait- 
ing," meaning  by  this  tei-m  a  putting  off  of  the  enjojTnont  of 
goods  in  hand  for  the  benefit  of  others.  The  lender  sells 
"waiting"  and  the  borrower  buys  it.  "Waiting"  thus  be- 
comes a  service  having  a  market  value.  The  price  which  the 
borrower  pays  for  the  service  rendered  him  by  the  lender's 
waiting  is  interest.  The  interest  question  is  thus  reduced  to 
the  question :  What  is  the  value  of  this  service  ? 

The  service  rendered  by  the  lender  through  "waiting" 
may  at  times  have  a  utility  of  the  highest  degree.  Circum- 
stances may  arise  under  which  it  will  save 'life,  as  in  the 
ease  of  a  farmer  whose  crop  has  been  destroyed  by  hail  and 
who  miLst  starve  if  others  are  not  willing  to  lend  him  the 
means  of  subsistence,  an  equivalent  of  which  he  could  without 
difficulty  return  to  the  lender  from  next  year's  crop.  From 
this  utility  of  highest  importance  the  possible  utilities  or 
advantages  that  may  be  derived  from  the  lender's  "waiting" 
range  down  through  all  grades  of  importance  to  the  vanish- 
ing point.  Therefore  the  value  of  the  service  of  lending  comes 
within  the  range  of  the  law  of  value,  and  according  to  the 
utility  theory  of  value  it  depends  upon  final  utility. 


200]  CAPITAL  GOODS  AND  RETURNS  263 

In  his  elaboration  of  the  law  of  value  Bohm-Bawerk  has 
clearly  shown  the  process  by  which  the  final  utility  of  a  com- 
modity, and  with  it  its  market  value,  is  determined ;  and  his 
reasoning  must,  of  course,  be  applicable  not  only  to  goods,  but 
to  all  forms  of  service  as  well.  Accordingly,  the  final  utility, 
and  with  it  the  value,  of  "waiting"  is  measured  by  the  im- 
portance of  that  concrete  want  which  is  least  urgent  among 
the  wants  that  are  met  from  the  available  supply  of 
"  waiting,  "■'s 

It  is  here  where  the  theory  clashes  with  facts,  especially 
during  periods  of  business  depression,  when  producers,  almost 
without  exception,  are  encumbered  by  an  accumulation  of 
products  for  M'hich  they  are  unable  to  find  a  market.  The 
supply  of  produced  things,  and  the  supply  of  labor  especially, 
vastly  exceeds  the  effective  demand.  The  wheels  of  industry'' 
come  to  a  partial  standstill,  not,  however,  by  reason  of  the 
propensity  of  men  to  postpone  productive  effort,  for  both 
manufacturers  and  workmen  are  anxiously  scanning  the 
market  for  every  opportunity  to  resume  work  that  has  been 
interrupted  by  an  apparently  occult  force.  If  the  status 
were  reversed,  if  the  supply  of  labor  and  its  products  were 
below  the  effective  demand  therefor,  the  hypothesis  might  be 
entertained  that  an  underrating  of  the  future  and  a  conse- 
quent desire  to  shirk  work  is  the  prevailing  condition.  But 
the  facts  are  otherwise.  Everywhere  production  has  run 
ahead  of  consumption.  Producers  are  forced  to  make  the 
sacrifice  of  "waiting"  without  any  hope  of  recompense  for 
it.  On  all  sides  the  supposed  benefits  of  "waiting"  irretriev- 
ably go  to  waste.  The  supply  of  the  service  "waiting"  far 
exceeds  the  demand,  for  otherwise  it  would  not  be  wasted. 
The  "least  urgent  want  met  from  the  available  stock,"  that 
is,  the  final  utility,  of  "waiting"  is  at  the  vanishing  point; 
hence,  according  to  the  accepted  theory  of  value,  the  value  of 
this  service,  like  the  value  of  air  and  of  water,  is  nil  (242). 

Under  our  existing  economic  conditions,  in  which  pro- 
ducers are  constantly  looking  for  markets  for  their  surplus 

"C/.  Bolim-Bawerk,  IT,  p.  148  (157). 


264  DISTRIBUTION  OF  WEALTH  [200 

productions,  the  conclusion  Avhich  we  have  reached,  namely 
that  the  value  of  "waiting"  is  nil,  is  indisputable. 

But  conditions  can  be  imagined  under  which  the  final 
utility,  and  with  it  the  market  price,  of  "waiting"  would 
have  a  positive  value,  and  under  which  the  reasons  advanced 
in  support  of  the  "Positive  Theory"  would  be  operative,  so 
that  the  value  of  "waiting"  would  naturally  and  properly 
accrue  to  the  ' '  waiter, ' '  the  lender. 

Let  us  suppose  that  a  number  of  men,  shipwrecked  on  an 
island,  have  gathered  stores  of  food  for  the  winter,  and  that 
some  have  succeeded  in  accumulating  more  than  others.  Sup- 
pose, further,  that  the  stores  of  the  less  fortunate  are  insuffi- 
cient to  maintain  them  until  the  crop  of  the  next  season  be- 
comes available,  while  others  have  some  food  to  spare,  but  not 
enough  to  supply  the  demand  of  those  who  need  more,  with- 
out stinting  themselves  to  some  degree.  Since  food,  in  this 
case,  is  the  only  form  of  wealth,  buying  and  selling  is  out  of 
the  question,  and  those  who  need  more  food  can  obtain  it  only 
by  borrowing.  There  will,  accordingly,  be  a  market  demand 
for  the  borrowing  of  food,  and  only  a  reluctant  supply  for 
lending.  The  intending  borrowers  not  only  offer  to  return  an 
equivalent  of  the  borrowed  amount,  but  are  willing  to  pay  a 
premium  in  addition,  while  the  lenders  can  be  induced  to 
forego  the  satisfaction  of  full  meals  during  the  winter  only 
through  the  offer  of  a  recompense.  There  is  an  upper  limit 
to  the  premium  the  borrowers  are  willing  to  promise,  as  well 
as  a  lower  limit  to  the  premium  lenders  require  for  their 
"waiting"  and  consequent  loss  of  comfort,  and  these  limits 
can  be  represented  by  curves  like  DD'  and  8S'  of  Fig.  6.  The 
market  rate  of  the  premium  is  then  manifestly  determined  at 
the  point  of  intersection  of  the  two  curves.  In  the  concourse 
of  the  market,  so  to  speak,  the  recompense  for  lending  adapts 
itself  to  the  point  where  the  desire  to  borrow  and  the  re- 
luctance to  lend  come  to  equality. 

It  is  to  be  observed  that  this  limit  can  have  a  positive  value 
only  if  the  supply  of  food  actually  gathered  is  not  sufficient  to 
fully  satisfy  all  during  the  time  before  the  next  season,  for  if 
any  of  the  stores  were  to  remain  unconsumed  by  the  time  the 


2011  CAPITAL  GOODS  AND  RETURNS  265 

next  crop  is  gathered,  the  final  utility  of  "waiting"  would 
be  nil.'" 

The  above  reasoning  may  be  applied  to  the  lending  of 
other  commodities,  and  of  money  as  well.  Unless  the  marginal 
lenders,  the  lenders  who  supply  the  least  urgent  want,  are 
obliged  to  deprive  themselves  of  some  definite  comfort  by 
"waiting,"  there  can  be  no  final  pain  of  abstinence,  nor  can 
the  preference  for  future  over  present  goods  make  itself 
manifest  as  a  factor  in  competition.  In  the  presence  of  any 
such  condition  as  that  known  as  "overproduction,"  the  final 
utility  of  "waiting"  cannot  have  a  positive  value. 

201.  Relation  of  Money  to  Merchandise. — Notwithstand- 
ing that  "waiting"  has  no  positive  value,  manufacturers  and 
merchants,  men  who  have  produced  goods  in  advance  of  the 
demand  therefor,  and  who  must  therefore  hold  these  present 
goods  until  some  future  time  without  any  hope  of  recompense 
for  the  "waiting,"  are  the  very  ones  who  flock  to  the  banks 
and  the  money  lenders,  seeking  to  obtain  present  money  in 
exchange  for  future  money,  seeking  to  buy  the  service  of 
"waiting,"  while  they  themselves  are  forced  to  let  their  own 
' '  waiting  "  go  to  waste.  In  the  light  of  the  * '  Positive  Theory ' ' 
they  are  purchasing  the  service  of  advance  production,  that  is 
to  say,  the  service  of  the  exchange  of  present  goods  for  future 
goods,  paying  a  high  and  often  ruinous  price  for  the  service, 
while  they  themselves  have  a  surplus  of  present  goods  and 
are  "waiting,"  not  only  without  recompense,  but  at  further 
cost  of  keeping  the  present  goods  for  the  future.  It  is  simply 
inconceiva])le  that  producers  have  so  little  understanding  of 
their  own  interest  as  to  pay  others  for  "waiting,"  while  they 
let  their  own  "waiting"  go  to  waste. 

WTien  the  reason  which  manufacturers  and  merchants 
liave  for  borrowing  money  is  more  carefully  examined,  it  will 
be  seen  that  what  they  seek  is  not  the  service  of  "waiting," 
but  the  peculiar  service  that  only  money  can  perform,  namely 

"  We  jiiust  of  course  assume  that  in  this  illustration  the  element 
of  risk  is  ultscnt,  for  the  prohlom  of  pure  interest  must  be  viewed  apart 
from  the  item  of  insurance. 


266  DISTRIBUTION  OF  WEALTH  [iOi 

that  of  making  payments  in  the  course  of  business.  A  par- 
tiality for  money  can  be  observed  not  only  among  borrowers, 
but  also  among  possessors  of  wealth  who  are  offering  it  for  sale, 

"What  is  the  reason  of  all  this  desire  to  get  money?  A 
strongly  marked  demand  for  money  in  exchange  for  products 
is  manifested  in  every  province  of  the  industrial  and  com- 
mercial world.  The  struggle  of  competition  resolves  itself  into 
efforts  to  get  money  for  merchandise  (345).  Vast  sums  are 
expended  in  the  process  of  selling.  Efficient  salesmen  com- 
mand high  salaries.  Even  unfair  means  are  at  times  resorted 
to  in  efforts  to  drive  competitors  from  the  field.  The  ceaseless 
search  for  markets  and  the  persistent  efforts  to  sell  are  re- 
flected in  the  prevailing  belief  that  the  prosperity  of  nations 
is  enhanced  when  they  export  more  than  they  import,  when 
they  send  out  more  present  goods  than  they  receive.  This 
belief  induces  governments  to  encourage  selling  and  discour- 
age buying,  promoting  exportation  by  bounties  and  impeding 
importation  by  tariffs.  Even  wars  have  been  waged  for  the 
purpose  of  securing  foreign  markets  for  the  home  products. 
Indeed,  the  persistent  outciy  for  tariffs  during  the  so-called 
periods  of  prosperity  as  well  as  during  times  of  depression 
irrefutably  proves  that  there  is  a  constant  excess  of  the  supply 
of  things  over  the  effective  demand,  and  a  constant  preponder- 
ance of  unrequited  "waiting,"  not  only  during  periods  of 
business  stagnation,  but  at  all  times.  Well  may  we  ask,  why 
is  it  that  the  mere  medium  of  exchange  is  so  much  more  in 
demand  than  products,  the  very  objects  of  exchange  (204, 
211)  ?  Can  the  "Positive  Theory"  furnish  an  answer  to  this 
question?  Since  money  more  than  any  other  form  of  wealth 
is  sought  by  would-be  borrowei*s,  the  theory  that  accounts  for 
interest  should  afford  light  on  this  question.    Let  us  see. 

202.  Money  Never  "  Present  Goods." — Of  the  goods  that 
are  offered  in  the  market  some  are  near  the  point  of  economic 
maturity,  others  are  not.  Some  are  practically  mature  or 
present  goods,  like  foodstuffs,  clothes,  furniture,  articles  of 
luxury.  Others  are  immature  goods,  such  as  cotton,  dry- 
goods,  steel  rails,  machines.  They  require  a  greater  or  less 
time  for  their  conversion,  by  industrial  or  other  processes, 
into  consumable  goods  or  desired  services.     All  of  them  are 


203]  CAPITAL  GOODS  AND  RETURNS  267 

adapted  to  render  gratification,  directly  or  indirectly,  sooner 
or  later,  after  their  sale  is  effected. 

But  Avhat  is  the  status  of  money  ?  What  gratification  does 
it  offer  to  the  consumer?  Neither  borrowers  who  obtain 
money  in  exchange  for  their  credit,  nor  manufacturers,  mer- 
chants and  workmen,  who  accept  money  in  exchange  for  goods 
or  services,  do  so  with  the  intention  of  actually  using  it  up. 
Those  who  accept  money  in  exchange  as  Avell  as  those  who 
borrow  it  expect  to  part  with  it  without  altering  its  condition. 
The  utilization  of  money  in  the  way  of  bodily  consumption 
is  not  sought  by  those  who  acquire  it ;  and  not  being  adapted 
to  be  consumed  by  its  holder,  money  is  the  most  typical  form 
of  "future  goods."  Hence,  a  loan  of  money,  instead  of  being 
an  exchange  of  present  for  future  goods,  is  an  exchange  of  one 
fonn  of  future  goods  for  another  form  of  future  goods.  The 
borrower  gives  his  ' '  promise-to-pay, ' '  that  is  to  say,  his  credit, 
in  exchange  for  the  banker's  "promise-to-pay,"  or  credit. 
And  if  the  banker  gives  gold  coin  instead  of  mere  bank  credit, 
that  which  he  gives,  like  the  borrower's  promissory  note, 
consists  of  strictly  "future  goods,"  that  is,  of  goods  not  in- 
tended for  consumption,  nor,  indeed,  so  adapted  except  when 
destroyed  as  money  by  being  melted  down  for  use  as  gold 
metal. 

From  this  it  is  apparent  that  the  lending  of  money  cannot 
be  considered  as  a  giving  of  present  in  exchange  for  future 
goods. 

203.  Money  Never  a  Means  of  Production. — Nor,  indeed, 
can  money  properly  be  classed  with  means  of  production,  or 
capital  goods  (130).  Such  classification  of  money  is  clearly 
inadmissible.  Although  money  is  universally  regarded  as 
capital,  it  is  certainly  not  of  the  kind  to  which  the  reasoning 
of  the  "Positive  Theory"  can  be  applied,  even  assuming  that 
this  theory  were  otherwise  valid.  The  argument  adduced  for 
classing  money  with  goods  in  storage  and  with  means  of  trans- 
portation as  Ix'ing  a  tool  of  commerce  and  therefore  a  fonn  of 
capital  goods  "°  proves  on  analysis  to  be  untenable.  Stored 
goods  are  goods  in  process  of  maturing,  at  least  so  long  as 

"  Bol.m-lJawerk,  11,  p.  GO  (70). 


268  DISTRIBUTION  OF  WEALTH  [203 

the  storage  is  a  normal  part  of  the  process  of  preparing  the 
goods  for  the  market.  They  are  passing  through  the  com- 
mercial stage  of  production,  namely  the  process  normally  neces- 
sary to  transfer  them  from  the  producer  to  the  consumer. 
During  the  normal  period  of  that  storage  the  value  of  the 
goods  increases,  this  increase  comprising  the  cost  of  storage 
plus  the  interest  supposed  to  accrue  through  the  gradual 
growth  of  value,  as  future  utilities  become  present  ones  (133). 
Money  presents  a  radically  different  case.  Turning  gold  from 
its  commercial  form  as  bullion  into  its  conventional  form  as 
coin  can  in  no  wise  be  classed  as  a  process  of  bringing  gold 
nearer  to  its  point  of  consumption.  None  of  the  latent  and 
immature  utilities  possessed  by  the  gold  composing  the  coin 
is  ripening  into  consumable  utilities  while  the  coin  is  being 
used  as  a  medium  of  exchange.  In  this  respect  money  differs 
radically  from  stored  goods.  The  present  value  of  money  can 
in  no  wise  be  regarded  as  the  discounted  estimate  of  its  future 
value.  The  value  of  money  does  not  increase  while  it  is  either 
stored  or  being  utilized.  On  the  contrary,  by  the  act  of  coin- 
ing the  processes  by  which  the  latent  utilities  of  gold  might 
have  been  matured  are  positively  arrested  for  an  indefinite 
time,  and  although  those  utilities  are  likely  to  be  brought  to 
use  only  in  the  far  distant  future,  if  at  all,  their  value  is  not 
discounted  in  consequence  of  the  fact.  Gold,  when  coined,  is 
distinctly  idle  capital,^^  for  the  latent  utilities  of  coined  gold 
remain  positively  in  statu  quo  (134).  Hence  the  "Positive 
Theory"  cannot  apply  to  money,  even  if  it  could  satisfactorily 
explain  the  power  of  capital  goods  to  bring  interest. 

Against  this  reasoning  may  be  advanced  the  argument  that 
gold,  when  coined,  and  money  generally,  is  adapted  to  perform 
a  most  important  commercial  function,  namely  that  of  mediat- 
ing exchanges  and,  as  a  commercial  tool,«-  should  be  classed 
with  "enduring  goods, "^^  namely  such  as  are  capable  of 
being  utilized  for  an  indefinite  time.  According  to  this  view 
it  would  follow  that  just  as  the  latent  utilities  of  the  tool  of 


Cf.  Bohm-Bawerk,  II,  p.  302  (319).  "  C/.  iUd.,  p.  67  (71), 

Cf.  ibid.,  pp.  339    (360)    ff. 


203]  CAPITAL  GOODS  AND  RETURNS  269 

production  "loom"  are  incorporated  in  the  product  "cloth" 
woven  on  it,  or  those  of  a  railroad  or  a  steamship  become  in- 
corporated in  the  things  transported  by  their  means,  so  the 
latent  utilities  of  the  tool  of  exchange,  "money,"  become  in- 
corporated in  the  products  exchanged  by  its  means. 

But  the  reasoning  according  to  which  the  latent  utilities 
of  the  loom,  while  being  transferred  to  the  cloth,  grow  in 
value  by  reason  of  the  underrated  future  utilities  becoming 
full  rated  present  ones — assuming,  for  the  sake  of  argument, 
the  supposed  discounting  of  the  future  to  be  a  dominant 
economic  factor — is  not  in  any  way  applicable  to  money,  as 
will  presently  appear. 

The  process  through  which  a  loom's  utility  is  transferred 
to  cloth  requires  time,  during  which  the  discounted  value  is 
supposed  to  grow  to  full  value.  The  latent  utilities  of  capital 
goods  in  general  are  brought  to  maturity  by  the  more  or  less 
continuous  application  of  labor  to  them,  a  process  involving 
time.  This  is  not  the  case  with  money  which  is  of  service  to 
its  possessor  only  for  a  momentary  transaction;  it  passes  out 
of  his  hands  the  very  moment  he  puts  it  to  use  in  effecting  an 
exchange  of  any  kind,  whether  in  making  a  purchase  or  in 
paying  an  account,  thus  serving  only  in  a  transfer  of  owner- 
ship of  things.  How,  then,  can  we  conceive  a  gradual  increase 
of  value,  as  the  supposed  underrated  future  becomes  full- 
rated  present,  seeing  that  the  utilization  of  money  is  but  a 
momentary  transaction  ? 

But  there  is  more  to  be  said  on  this  point.  Experience 
shows  that  when  cloth  is  produced  on  a  loom,  the  value  of  the 
cloth  exceeds  the  value  of  the  yarns  plus  the  cost  of  weaving, 
the  latter  including  wear  and  tear  of  the  loom,  etc.  This 
excess  is  the  interest  accruing  to  the  capital  invested  in  the 
process  of  weaving.  When  goods  are  transported  from  one 
place  to  another,  it  is  because  they  have  a  higher  value  at  the 
point  of  destination  than  where  they  are  produced,  and  here 
we  also  find  that  the  difference  of  value — the  price  of  transpor- 
tation— exceeds  the  co.st  of  the  process  inclusive  of  loss  through 
wear  of  rolling  stock  and  road  bed.  This  excess  is  the  in- 
terest accruing  to  capital  invested  in  the  means  of  transpor- 


270  DISTRIBUTION  OF  WEALTH  [203 

tation.  When  wine  is  stored  for  ageing,  the  increase  of  its 
value  exceeds  cost  and  risk  of  storage,  and  the  excess  affords 
the  interest  of  the  capital  invested.  But  when  money  is  used 
in  payment  for  goods  purchased,  neither  the  goods  nor  the 
money  show  any  gain  in  value.  Everybody  realizes  that  "while 
a  man  keeps  money,  he  loses  interest  on  it."  A  borrower  of 
money  begins  to  reap  interest  only  after  he  has  parted  Avith  the 
money,  and  then  only  out  of  the  capital  goods  he  has  obtained 
through  it.  It  is  thus  apparent  that  the  function  of  money  is  in 
no  way  analogous  to  that  of  means  of  production,  and  that  the 
relation  of  money  to  interest  is  radically  different  from  the 
relation  of  capital  goods  to  interest.  From  this  it  follows  that 
the  causes  which  compel  a  borrower  of  money  to  pay  interest 
for  its  use  are  totally  different  from  those  which  compel  the 
borrower  of  capital  goods  to  pay  interest  for  their  use. 

The  function  of  money  differs  radically  from  that  of 
capital  goods  (211).  Money  is  in  no  wise  essential  to  the 
processes  of  forwarding  capital  goods  from  the  immature  to 
the  mature  state.  These  processes  are  those  of  changing  the 
form,  composition  or  location  of  things,  or  of  protecting  them 
against  destruction.  The  function  of  money  is  solely  that  of 
mediating  changes  of  ownership  of  the  things  produced  or  in 
process  of  production.  Money  is  not  a  tool  of  construction, 
but  only  a  tool  of  exchange.  For  constructive  purposes  money 
possesses  no  utility  whatsoever,  and  for  the  purposes  of  ex- 
change a  system  of  bookkeeping  would  answer  as  well  (90). 

From  whatever  standpoint  we  approach  this  question,  we 
can  find  no  justification  for  classing  money  either  with  "pres- 
ent goods"  ®*  or  with  "capital  goods,"  ®^  if  the  latter  are  con- 
ceived as  consisting  of  future  goods  ripening  into  present 
goods.  Money  as  such  is  essentially  idle  or  dead  capital  and, 
like  credit,  must  logically  be  classed  with  "future  goods,"  and 
as  such  it  is  not  even  ripening  into  a  present  good.  The 
supposed  undervaluation  of  the  future,  therefore,  cannot  pos- 
sibly explain  why  men  are  so  anxious  to  get  money  for  mer- 
chandise, and  why  borrowers,  who  have  quantities  of  mer- 


Cf.  Bohm-Bawerk,  II,  p.  285    (300).  "  C/.  ibid.,  p.  06  (70) 


204]  CAPITAL  GOODS  AND  RETURNS  271 

chandise  unused  on  their  hands,  so  willingly  pay  interest  for 
the  loan  of  money, 

204.  Calvin's  Reasoning. — As  already  stated,  John  Calvin, 
even  as  far  back  as  the  sixteenth  century,  undertook  to  explain 
the  willingness  of  borrowers  to  pay  interest  on  the  ground  that 
it  is  not  the  money  that  brings  a  legitimate  earning,  but  the 
house,  or  the  field  obtained  in  exchange  for  the  money  (190, 
237) .  Idle  money,  he  realized,  is  sterile ;  but  the  borrower  does 
not  keep  it  idle:  he  acquires  in  exchange  for  it  something 
that  is  productive.  And  this  is  indeed  the  view  taken  by  the 
business  man  generally.  He  borrows  money  because  money  is 
freely  accepted  in  exchange  for  any  form  of  wealth  suited  to 
his  purpose.  With  the  borrowed  money  he  buys  capital  goods, 
and  by  working  with  them  he  derives  that  profit  which  is  here 
under  consideration. 

But  by  taking  for  granted  that  with  money,  which  does 
not  afi^ord  interest  to  the  user,  there  may  be  bought  any  kind 
of  capital  goods  which  do  afford  interest  to  the  user,  we  are 
brought  back  to  the  point  from  which  we  started  (201).  We 
started  to  find  out  why  it  is  that  there  is  a  greater  demand 
for  the  medium  of  exchange  than  there  is  for  the  objects  of 
exchange ;  we  were  looking  for  the  cause  of  the  general  desire 
of  men  to  get  money  for  merchandise,  that  is,  a  future  good 
in  exchange  for  a  present  good,  and  are  brought  to  a  point 
where  we  find  that  cause  to  be  the  universal  readiness  of  men 
to  give  merchandise  for  money,  that  is,  present  goods  for 
future  goods.  Calvin's  argument,  so  generally  accepted,  is 
simply  a  case  of  reasoning  in  a  circle  (242).  While  there  is 
no  difficulty  in  explaining,  consistently  with  the  ** Positive 
Theory,"  the  willingness  of  men  to  give  merchandise  in  ex- 
change for  capital  goods,  that  is,  present  goods  in  exchange 
for  future  goods,  the  value  of  which  increases  as  time  advances 
— this  value  being  equal  to  the  discounted  value  of  their  future 
utilities — wo  have  thus  far  found  nothing  to  explain  their 
willingness  to  give  merchandise  for  money,  that  is,  present 
goods  in  exchange  for  future  goods,  the  present  value  of  which 
equals  the  undiscounted,  value  of  their  future  utilities,  a  value 
which  does  not  increase  as  time  advances. 


272  DISTRIBUTION  OF  WEALTH  [205 

Even  if  it  were  really  true  that  capital  goods,  the  instru- 
ments of  production,  command  interest  because  of  the  under- 
rating of  the  value  of  future  goods,  it  still  would  not  follow 
that  interest  accrues  to  money  for  the  same  reason.  The  ex- 
planation adduced  by  Calvin  is  no  more  valid  than  that  pro- 
pounded by  Turgot  in  what  Bohm-Bawerk  has  termed  the 
"Fructification  Theory  of  Interest,"  the  fallacy  of  which  he 
himself  so  conclusively  shows.®*^ 

205.  Interest  as  an  Inducement  to  Production  of  Capital. 
— On  a  par  with  the  theory  of  the  discounted  future  is  the 
earlier  idea,  which  forms  the  basis  of  Turgot 's  theory,  that  the 
power  of  capital  to  bring  interest  is  an  inducement  essential 
to  the  production  and  investment  of  capital  (190,  317). 

This  idea  is  tersely  expressed  by  the  question  propounded 
by  Bohm-Bawerk,  whether — 

a  man  of  affairs  would  permanently  continue   an  enterprise   in  which 
the  invested  capital  does  not  earn  interest." 

To  be  sure,  no  business  man  would  do  so  while  capital  can 
be  invested  in  other  enterprises  that  do  return  interest.  But 
when  the  nature  and  cause  of  interest  are  in  question,  it  is 
illogical  to  assume  that  interest  exists  in  the  very  nature  of 
things.  We  should  inquire  whether  a  manufacturer  of,  say, 
knit  gloves,  having  the  choice  between  making  them  by  hand 
or  by  machine,  would  really  be  so  shortsighted  as  to  choose  the 
primitive  method  just  because  the  machine  method,  although 
yielding  more  products  in  the  end,  will  not  do  so  from  the 
beginning.  The  gain  in  productivity,  and  eventually  in  time 
also,  through  the  employment  of  capital  is  in  itself  an  induce- 
ment for  the  employer  to  apply  it  in  production.  Since  the 
income  of  the  employer  as  such  is  what  is  left  of  the  value  of 
his  products  after  all  costs  have  been  defrayed  (167),  he, 
more  than  anyone  else,  is  interested  in  adopting  the  most 
efficient  method  of  production  (318),  and  to  him  it  is  imma- 
terial whether  he  gets  this  residual  share  as  interest  or  as 
wages.  If  he  does  not  keep  up  with  the  progress  of  the  time, 
he  cannot  hold  his  own  against  competition.     The  supposition 

*"  Buhm-Bawerk,    I,    pp.    Gl     (71)    ff. 

'"Quarterly  Journal  of  Economics,  January,  1806,  p.  141. 


206.  207]       CAPITAL  GOODS  AND  RETURNS  273 

that  interest  is  necessary  as  an  inducement  to  the  employment 
of  capital,  whether  in  the  starting  or  in  the  continuance  of 
enterprises,  is  clearly  without  foundation. 

206.  Summary. — From  the  foregoing  it  follows  that  the 
premises  of  the  "Positive  Theory"  are  groundless.  The  in- 
direct and  complex  methods  of  production,  involving  the  em- 
ployment of  capital,  instead  of  being  protracted,  are  in  fact 
expeditious  when  compared  with  simpler  and  more  direct 
methods.  Even  though  "waiting"  be  considered  as  involving 
effort,  the  waiting  required  by  capitalistic  production  between 
the  time  of  effort  and  of  the  consequent  gratification  is  much 
more  than  compensated  by  the  increase  of  productivity.  When 
compared  with  the  time  of  "waiting"  required  by  primitive 
methods  of  production,  the  period  of  increased  waiting  in- 
cident to  the  use  of  capital  is  terminated  in  a  brief  space  of 
time  and  is  therefore  to  be  considered  as  a  concomitant  of 
progress  and  not  of  capitalistic  production. 

But  we  cannot  even  find  any  facts  in  the  business  world 
that  would  justify  the  assumption  that  "waiting"  is  econom- 
ically to  be  accounted  as  effort,  or,  to  put  it  otherwise,  that 
the  preference  of  "present"  over  "future"  goods  is  adequate 
to  account  for  pure  interest ;  and  since  money  cannot  properly 
be  classed  either  with  present  goods  or  with  capital  goods,  the 
theorj",  even  if  it  were  competent  to  account  for  the  "earn- 
ings" of  capital  goods,  cannot  in  any  way  account  for  the 
power  of  money  to  command  interest.  Moreover,  the  assump- 
tion that  interest  is  essential  as  an  inducement  to  the  accumu- 
lation of  capital  is,  in  the  last  analysis,  found  to  be  un- 
warranted. It  is  manifest  that  the  phenomenon  of  interest 
is  due  to  economic  forces  other  than  those  adduced  by  the 
author  of  the  "Positive  Theory  of  Capital"  to  explain  it. 

207.  The  "  Surplus  Value  "  Theory. — The  theories  thus 
far  considered  are  attempts  to  trace  capital  returns  to  natural 
causes  and  so  to  explain  interest.  On  the  other  hand,  the 
"Surplus  Value  Theory"  of  Karl  Marx,  propounded  in  his 
work  "Das  Kapital,"  ascribes  these  returns  to  some  sinister 
influence  of  the  prevailing  system  of  "capitalistic  production" 
and  a  supposed  exploitation  of  labor  involved  in  that  system. 

18 


274  DISTRIBUTION  OF  WEALTH  [208 

Capital  returns  and  money  interest  are  accordingly  condemned 
as  morally  indefensible.  The  theory  is  substantially  as  follows : 

Under  the  capitalistic  system  of  production  the  workman 
who  has  no  capital  is  compelled  to  sell  to  a  capitalist  his  "labor 
power ' '  which,  as  a  merchandise,  has  a  value  measured  by  the 
labor  time  required  for  its  "production"  (164a).  This  value, 
then,  is  the  purchase  price  of  labor  power;  it  is  that  which  is 
called  ' '  wages. ' '  The  capitalist  buys  labor  power  at  this  value 
by  paying  wages.  It  costs  him  only  an  amount  measured 
by  the  labor  time  required  for  the  production  of  the  means 
of  subsistence  and  propagation  of  the  laborer.  A  day's  labor 
power  costs  what  can  be  produced  by,  say,  a  half-day's  labor 
time.  But  having  bought  it,  the  capitalist  puts  it  to  work  for 
the  whole  day,  and  the  value  produced  is  greater  than  the  cost, 
the  difference  being  "surplus  value"  which  is  appropriated 
by  the  purchaser  of  the  labor  power,  the  capitalist. 

This  theory  is  founded  on  the  wage  theory  advanced  by 
the  same  author.  The  fallacy  of  the  wage  theory  having 
already  been  pointed  out  (1646),  this  would  in  itself  be  reason 
enough  to  dismiss  the  matter  without  further  comment;  but 
as  the  theory  itself  is  in  conflict  with  every-day  experience,  a 
few  more  words  on  the  subject  may  not  be  amiss. 

208.  The  Theory  Inconsistent  with  Facts. — According  to 
the  surplus  value  theory  the  capitalist,  in  order  to  acquire 
surplus  value,  need  do  nothing  more  than  buy  labor  power 
and  put  it  to  work.  If  the  acquisition  of  riches  were  really 
such  a  simple  matter,  it  would  be  inconceivable  that  any  of  the 
labor  power  offered  in  the  market  would  ever  go  begging  for  a 
purchaser.  The  demand  for  it  would  be  so  great  that  none 
would  be  left  for  sale. 

But  what  do  we  find  in  reality?  The  question  of  how  to 
provide  work  for  the  unemployed  has  long  been  a  serious 
political  and  economic  problem  the  world  over.  This  is  in 
direct  conflict  with  Marx's  thesis.  It  is  true,  endeavors  have 
been  made  to  harmonize  the  surplus  value  doctrine  with  these 
facts  by  pointing  out  that  so  long  as  the  workers  receive  wages 
amounting  to  only  a  portion  of  the  value  which  they  produce, 
they  are  unable  to  buy  all  of  their  products  with  their  wages. 
That  portion  of  the  remainder  which  is  not  consumed  by  the 


208]  CAPITAL  GOODS  AND  RETURNS  275 

capitalists  must  remain  unsold,  and  this,  it  is  alleged,  accounts 
for  what  is  called  "overproduction"  and  for  the  consequent 
lack  of  employment. 

But  this  explanation  conflicts  with  INIarx's  characterization 
of  capitalists  as  being  possessed  of  an  insatiable  greed  for  sur- 
plus value.  Having  gotten  the  surplus  value,  why  should  they 
put  it  on  the  market  for  sale?  After  purchasing  the  labor 
power,  they  can  control  production  so  that  only  part  of  the 
labor  is  applied  to  the  production  of  the  necessaries  of  the 
workers  and  another  part  to  the  production  of  those  forms 
of  wealth  for  which  they  are  so  greedy  and  which,  after  being 
appropriated  by  them,  would  not  have  to  be  put  on  the  market 
and  so  cause  an  excess  of  supply  over  demand.  The  deplor- 
able fact  that  business  depressions  and  lack  of  employment 
are  features  of  the  present  industrial  system  conclusively  dis- 
proves the  reasoning  of  Karl  Marx. 

During  periods  of  business  stagnation,  whatever  their  cause, 
the  competition  among  workmen  for  employment  results  in  a 
reduction  of  wages.  Low  wages,  then,  are  the  result  of  an 
insufficient  demand  for  labor.  To  harmonize  the  socialistic 
theory  with  facts  it  is  asserted,  on  the  contrary^,  that  low 
Avages  are  not  the  result,  but  the  cause  of  the  accumulation  of 
unsold  products  and  the  consequent  low  demand  for  labor. 
This  is  clearly  a  case  of  "putting  the  cart  before  the  horse," 
of  confusing  cause  and  effect. 

Marx  has  evidently  taken  a  one-sided  view  of  industrial 
affairs.  He  wholly  overlooked  the  significance  of  the  intermin- 
able series  of  failures  and  bankruptcies  in  the  "capitalistic" 
world.  Facts  do  not  bear  out  the  notion  that  employers  gen- 
erally are  the  recipients  of  "surplus  value."  Business  men 
keenly  feel  the  difficulty  against  which  they  must  contend. 
It  is  not  a  rare  thing  that  wage  workers,  so  called  "wage 
slaves,"  accumulate  enough  capital  to  become  "capitalists" 
themselves,  only  to  lose  as  employers  all  they  had  saved  as 
employes. 

The  "Surplus  Value  Theory"  not  only  lacks  logical  basis, 
but  is  also  completely  disproved  by  the  constant  occurrence 
of  business  failures  and  by  the  frequent  recurrence  of  business 
depression. 


CHAPTER  XI 

MONEY  AND  MONEY  INTEREST 

209.  Interest  on  Money  Loans. — Up  to  this  stage  of  our 
discussion  we  have  used  the  term  "capitalist"  as  including  not 
only  the  owner  or  owners  of  the  capital  employed  in  a  busi- 
ness, but  also  the  lender  or  lenders  of  any  money  employed 
therein.  But  in  examining  the  relation  of  the  income  of  the 
money-lender  to  that  of  the  capitalist,  we  must  distinguish 
the  lender  of  money  used  in  a  business  from  the  "capitalist" 
who  owns  only  the  remaining  part  of  the  capital. 

When  the  capital  of  a  productive  group  is  owned  in  its 
entirety  by  the  capitalist  of  the  group,  its  returns  accrue  to 
him  alone.  But  when  a  portion  of  the  capital  is  obtained  by 
borrowing  money,  the  capital  returns  are  shared  between  the 
capitalist  and  the  money-lender  through  the  payment  of  in- 
terest on  the  borrowed  money.  In  the  average  the  sharing  is 
about  in  proportion  to  the  parts  of  the  total  capital  owned 
by  the  capitalist  and  the  money-lender  respectively. 

It  is  commonly  held  that  when  a  business  man  borrows 
money  to  increase  his  working  capital,  he  is  willing  to  pay 
interest  on  the  loan  because  that  increase  of  capital  affords 
him  an  increase  of  profits  (186,  257).  From  this  it  would 
follow,  as  Calvin  and  others  have  insisted,  that  the  interest 
is  paid,  not  for  the  use  of  money,  but  for  the  use  of  the  capital 
goods  bought  with  the  money.  No  business  man  borrows 
money  for  the  purpose  of  keeping  it;  he  intends  to  use  it  in 
payment  for  things  or  services,  or  in  paying  debts  for  things 
or  services  already  received. 

This  view  is  clearly  presented  by  many  writers  on 
economics.    According  to  Simon  Newcomb : 

What  the  borrower  really  pays  interest  for  is  capital,  not  money. 
The  borrower  can  gain  nothing  by  keeping  the  money;  all  he  borrows  it 
for  is  to  purchase  some  kind  of  capital.     .     .     .     We  see  then  that  what 
276 


y 


210]  MONEY  AND  MONEY  INTEREST  277 

is  called  the  rate  of  interest  on  money  is  not  a  property  of  the  money 
itself,  but  depends  upon  the  advantage  which  capital  gives  its  owner  in 
production." 

John  Stuart  Mill  went  into  greater  detail  in  trying  to 
show  that  the  interest  paid  on  borrowed  money  is  really  paid 
for  the  use  of  capital  goods  bought  with  that  money. 

Money,  which  is  so  commonly  understood  as  the  synonyme  of 
wealth,  is  more  especially  the  term  used  to  denote  it  when  it  is  the 
subject  of  borrowing.  When  one  person  lends  to  another,  as  well  as 
when  he  pays  wages  or  rent  to  another,  what  he  transfers  is  not  the 
mere  money,  but  a  right  to  a  certain  value  of  the  produce  of  the  country 
to  be  selected  at  pleasure,  the  lender  having  first  bought  this  right  by 
giving  for  it  a  portion  of  his  capital.  What  he  really  lends  is  so  much 
capital;  the  money  is  the  mere  instrument  of  transfer.  But  the  capital 
usually  passes  from  the  lender  to  the  receiver  through  the  means  either 
of  money,  or  of  an  order  to  receive  money,  and  at  any  rate  it  is  in 
money  that  the  capital  is  computed  and  estimated.  Hence  borrowing 
capital  is  universally  called  borrowing  monej';  the  loan  market  is  called 
tlie  money  market;  those  who  have  their  capital  disposable  for  in- 
vestment on  loan  are  called  the  monied  class;  and  the  equivalent  given 
for  the  use  of  capital,  or  in  other  words,  interest,  is  not  only  called 
the  interest  of  money,  but  by  a  grosser  perversion  of  terms,  the  value 
of  money."  " 

It  is  manifest  from  the  above  quotation  that  Mill  clearly 
distinguished  between  "money"  and  "capital,"  using  the  tenn 
"money"  as  meaning  a  credit  instrument  conveying  a  right  to 
receive  value,  and  the  term  "capital"  in  the  sense  of  capital 
other  than  money,  which  cannot  be  anything  else  than  capital 
goods. 

210.  Money  Interest  is  Paid  for  the  Use  of  Money. — On  a 
close  examination  of  the  argument  presented  by  Mill,  the 
conclusion  of  which  is  re-stated  by  Newcoml)  and  others,  it 
will  be  found  that  this  conclusion  is  not  warranted  by  tho 
premises.  It  is  assumed  in  the  argument  that  what  tlie  bor- 
rower is  seeking  is  capital  ant!  not  money.  Investigation,  how- 
ever, discloses  the  fact  that  what  the  borrower  is  after  is  money 
and  that  the  interest  which  he  pays  to  the  lender  of  money  is 
paid  for  the  use  of  money  and  not  for  the  use  of  capital. 

"Newcomb,  pp.  305-306.  "•Mill,  II,  pp.  2.')-2(J. 


278  DISTRIBUTION  OF  WEALTH  [210 

The  hypothetical  ease  presented  by  Mill  is  found  to  em- 
brace in  its  scope  three  independent  transactions  effecte<l 
between  four  different  parties,  of  whom  the  second  is  the 
lender  and  the  third  the  borrower  in  the  case. 

The  first  of  the  four  is  the  initial  owner  of  the  money 
from  whom,  in  the  first  transaction,  the  second  party,  our 
lender,  obtains  the  money  "by  giving  for  it  a  part  of  his 
capital."  In  the  second  transaction  the  second  party,  the 
lender,  loans  this  money  to  the  third  party,  the  borrower.  Then 
comes  the  third  transaction  in  which  the  borrower  iLses  the 
money  in  getting  actual  capital  from  the  fourth  party  by  way 
of  purchase. 

The  first  transaction  is  a  sale  of  capital,  described  by  Mill 
as  an  exchange  of  "a  portion  of  his  capital"  for  a  "right  to 
a  certain  value  of  the  produce  of  the  country  to  be  selected 
at  pleasure."  This  is  clearly  a  call  loan  of  real  capital,  inas- 
much as  the  second  party  can  get  back  an  equivalent  of  his 
capital  "at  pleasure."  So  long  as  he  refrains  from  getting  it 
back,  he  is  a  creditor.  Does  he  receive  interest  for  this  call 
loan?  By  no  means.  The  certificates  which  he  obtained  for 
his  capital,  and  which  prove  that  he  is  a  creditor,  are  not 
merely  credit  instruments;  they  are  money.  But  this  does 
not  change  the  fact  that  while  possessing  the  money  he  is  a 
creditor  (89).  He  being  a  creditor,  who  is  the  debtor?  Is  it 
the  first  party  to  whom  he  gave  "a  portion  of  his  capital"  in 
exchange  for  the  money  ?  Not  at  all.  Before  the  first  transac- 
tion took  place,  that  first  party,  as  possessor  of  money,  was  a 
creditor  who  merely  received  "a  certain  value  of  the  produce 
of  the  country"  when  he  bought  the  capital  of  the  second 
party,  the  lender.  The  real  debtor  in  the  case  is  the  issuer  of 
the  money  who,  when  he  issued  it,  received  actual  wealth  in 
exchange  for  a  mere  credit  instrument  (92).  Does  the  second 
party,  while  holding  the  money,  that  is,  a  "right  to  a  certain 
value,"  obtain  interest  from  that  real  debtor?  We  all  know 
that  he  does  not  (264a).  The  credit  instrument  he  received 
is  money,  something  for  which  he  can  get  interest  if  he  lends 
it  out. 

In  Mill's  account  of  the  case  he  does  lend  it  out  to  our 


210]  MONEY  AND  MONEY  INTEREST  279 

third  party,  the  borrower,  and  takes  his  promissory  note  for  it. 
This  constitutes  the  second  transaction.  The  lender,  the  second 
party,  having  obtained  from  the  first  party  a  right  to  a  certain 
value,  turns  it  over  to  the  borrower  in  exchange  for  the  latter 's 
promise  to  pay.  It  will  be  observed  that  we  have  here  an  ex- 
change merely  of  two  credit  instruments,  namely  money  on 
the  one  hand  and  the  promissory  note  on  the  other,  and  that 
no  real  capital,  no  capital  goods,  change  hands.  Following 
this  exchange  the  lender  is  still  creditor.  It  is  true,  he  no 
longer  possesses  a  "right  to  a  certain  value  of  the  produce  of 
the  country  to  be  selected  at  pleasure,"  but  in  its  place  he  has 
the  promissory  note  which  conveys  a  right  to  a  certain  value 
of  the  borrower's  possessions  (68).  The  borrower  is  now  both 
debtor  and  creditor;  debtor  as  the  maker  of  the  promissory 
note,  and  creditor  by  reason  of  holding  a  **  right  to  a  certain 
value, ' '  the  money.-  But  from  the  moment  of  this  transaction, 
in  which  no  transfer  of  capital  takes  place  and  which  consists 
merely  of  an  exchange  of  two  credit  instruments,  the  borrower 
pays  interest  to  the  lender.  Is  this  interest  paid  for  capital 
received  ?  By  no  means,  for  the  borrower  does  not  receive  any 
capital;  he  receives  only  one  kind  of  credit  instruments  for 
another  kind.  To  be  sure,  this  kind  of  credit  instruments 
conveys  a  universally  recognized  right  to  a  certain  "value  of 
the  produce  of  the  country,"  realizable  at  any  moment;  it  is 
money,  while  that  M^hich  he  gives  in  exchange  is  but  a  promis- 
sory note,  and  as  such  is  recognized  only  as  a  claim  to  a  certain 
value  of  that  portion  of  the  produce  of  the  country  which  is  in 
possession  of  the  borrower,  and  which  is  realizable  only  at  a 
stated  future  time.  If  the  borrower  pays  the  interest  for  the 
use  of  capital  and  not  for  the  use  of  money,  as  is  generality 
held,  Avhat  capital  is  it,  and  whose?  According  to  the  gen- 
erally accepted  theory,  which  Mill  only  paraphrases,  the 
lend(?r  uses  the  money  merely  as  an  instrument  for  trans- 
ferring capital  to  the  borrower.  But  the  lender  has  already 
transferred  the  capital  in  question  to  the  first  party,  the  one  to 
whom  he  sold  it  and  from  whom  lie  got  a  receipt  therefor  in  the 
form  of  money.  He  certainly  cannot  transfer  this  capital 
also  to  the  borrower,  and  it  is  therefore  certain  that  the  bor- 


280  DISTRIBUTION  OF  WEALTH  [210 

rower  does  not  pay  interest  for  the  capital  which  has  been 
furnished  by  the  lender  of  the  money.  It  is  true,  the  borrower 
does  ultimately  get  capital,  but  he  gets  it  from  the  fourth 
party  when,  in  the  third  transaction,  he  pays  the  money  for  it. 
Does  he  pay  interest  to  the  lender  of  the  money  for  the  use  of 
that  capital  ?  If  so,  why  does  he  begin  to  pay  interest  before 
he  receives  that  capital,  and  why  does  he  not  pay  it  to  this 
fourth  party  from  whom  he  gets  the  actual  capital? 

The  facts  of  the  case  cannot  reasonably  be  interpreted 
otherwise  than  that  the  interest  is  paid  for  the  use  of  the 
money  and  not  for  the  use  of  the  capital  (134,  241,  2646).  It 
is  counted  from  the  moment  a  credit  instrument  which  is 
money,  is  given  for  a  credit  instrument  which  is  not  money, 
but  never  from  the  time  when  actual  capital,  which  has  the 
capacity  of  being  utilized  in  production,  is  given  for  money 
which  has  no  such  capacity.  It  is  paid  to  the  man  who  gives 
money  in  exchange  for  a  promissory  note,  but  not  to  the  man 
who  delivers  the  real  capital  in  exchange  for  the  credit  instru- 
ment, money.  The  obligation  to  pay  interest  manifestly 
originates  in  transactions  in  which  credit  in  the  form  of  money 
is  exchanged  for  credit  that  is  not  in  the  form  of  money,  but 
never  in  those  transactions  in  which  real  capital  is  exchanged 
for  credit  in  the  form  of  money.  The  only  reasonable  con- 
clusion is  that  interest  is  paid  for  the  advantage  afforded  by 
credit  which  is  in  the  form  of  money  over  credit  that  is  not 
in  the  form  of  money.  Interest  is  paid  for  the  use  of  money 
and  not  for  the  use  of  capital  goods.  The  time-honored  notion 
that  interest  is  paid  to  the  lender  of  money  for  the  use  of 
"capital"  is  groundless. 

The  fallacy  of  the  idea  that  capital  is  transferred  from 
the  lender  to  the  borrower  through  the  medium  of  money  (211) 
is  the  most  apparent  when  the  money  loaned  is  in  process  of 
being  issued  through  the  agency  of  the  lender.  The  money 
issued,  say,  through  a  national  bank,  has  not  been  obtained 
by  that  bank  in  return  for  "a  portion  of  its  capital,"  but  in 
return  for  the  deposit  merely  of  a  security  in  the  form  of 
bonds,  which  security,  however,  remains  the  property  of  the 
bank  together  with  all  its  usufruct.     Here  is  plainly  a  case 


211]  MONEY  AND  MONEY  INTEREST  281 

where  the  main  basis  of  ^lill's  argument,  namely,  that  money 
is  the  instrument  of  transferring  capital,  is  illusory,  inasmuch 
as  the  lender  has  not  transferred  capital — that  is,  capital 
goods — in  getting  the  money,  and  does  not  transfer  capital  in 
lending  it.    And  yet,  he  gets  interest. 

211.  The  Industrial  Function  of  Money. — Our  conclusion 
that  the  borrower  of  money  pays  interest  for  the  use  of  money 
and  not  for  the  use  of  the  capital  goods  he  buys  with  the 
money  seems  to  conflict  with  the  obvious  fact  that  interest  is  a 
share  of  the  wealth  produced  when  labor  and  capital  goods 
are  conjointly  employed  in  the  process  of  production.  Money 
plays  no  part  whatever  in  the  wealth-producing  process,  its 
function  being  that  of  merely  facilitating  exchanges.  Hence 
it  is  the  provider  of  capital  goods  who  furnishes  that  through 
which  labor  is  enabled  to  create  the  wealth  out  of  which  in- 
terest is  paid,  and  not  the  provider  of  money;  and  yet,  we 
have  here  the  incongruity  that  interest  is  paid  to  the  lender  of 
money  and  not  to  him  who,  when  he  gives  goods  in  exchange 
for  money,  which  is  only  a  credit  instrument  (89),  becomes  the 
real  lender  of  the  capital  goods,  the  lender  of  that  which  is 
the  real  embodiment  of  human  effort. 

Before  we  can  find  our  way  out  of  this  labyrinth  of  seem- 
ing contradictions,  we  must  learn  hoAV  and  why  it  is  that 
capital  goods,  capable  of  yielding  an  income  when  employed, 
are  so  freely  offered  for  money  which  cannot  be  used  in  the 
process  of  production  (201).  This  we  can  do  by  carefully 
analyzing  the  real  function  which  money  performs  in  the 
industrial  and  commercial  world. 

In  the  modem  industrial  world  products  are  advanced 
from  crudest  fonns  to  the  finished  state  by  the  efforts  of  suc- 
cessive groups  of  workers  (127).  Each  group  receives  as  its 
own  raw  materials  the  completed  products  of  the  preceding 
groups  and  advances  them  one  step  forward  toward  maturity. 
To  illustrate,  tlie  group  represented  by  the  cloth  manufacturer 
obtains  from  other  groups  looms  and  yarns  which  are  used  in 
the  manufacture  of  cloth.  Although  the  finished  product, 
the  cloth  of  our  illustration,  is  by  no  means  a  mature  com- 
modity, the  group  represented  by  the  cloth  manufacturer  is 


282  DISTRIBUTION  OP  WEALTH  [211 

not  in  a  position  to  further  advance  it,  for  the  function  of 
this  group  is  restricted  to  the  forwarding  of  the  product  by 
that  one  step.  The  cloth  manufacturer  is  not  also  a  tailor. 
For  him  the  cloth  is  idle  capital  (243),  and  in  order  to  con- 
vert this  idle  capital  into  active  capital,  it  must  be  sold  and 
the  proceeds  applied  to  the  purchase  of  material  for  producing 
cloth.  To  this  end  the  maker  of  the  cloth  sells  it  off  as  fast 
as  he  can,  and  with  the  money  obtained  he  pays  the  wages 
of  his  employes  and  buys  yarns  and  other  supplies. 

Here  we  find  a  leading  thread  in  the  maze.  When  a  busi- 
ness man  gives  capital  goods  in  exchange  for  money,  he  gives 
capital  which  has  become  idle  for  him,  in  exchange  for  money 
which  is  likewise  idle  for  him  so  long  as  he  keeps  it.  But 
although  the  money  is  idle  capital,  it  is  more  useful  to  him 
than  the  idle  capital  which  he  gave  for  it,  because  the  money 
is  a  means  through  which  he  can  acquire  that  which  to  him  is 
active  capital.  In  the  processes  of  production  active  capital  is 
constantly  advanced  by  each  productive  group  to  a  stage  in 
which  it  becomes  idle  capital  for  that  group,  and  money  is  a 
means  through  which  this  idle  capital  can  be  exchanged  for 
capital  which  is  active  for  that  group  (203,  241a,  242,  245). 
When  capital  goods  are  sold  by  one  group  to  another,  the 
goods  which  are  idle  capital  to  the  seller  become  active  capital 
to  the  buyer. 

The  bricks  in  a  brick-yard,  the  lumber  in  a  saw-mill,  the 
engines  and  the  looms  in  the  hands  of  the  machine  builders, 
the  yarns  made  by  the  spinner  and  all  other  tools  and  sup- 
plies needed  in  the  manufacture  of  cloth  can  become  active 
capital  only  when  these  things  have  been  assembled  in  the 
construction  and  equipment  of  the  cloth  factory.  If  a  single 
essential  element  of  the  combination  is  lacking,  the  other  fac- 
tors cannot  be  used  and  are  idle  capital  until  the  missing 
element  is  supplied.  Considering  that  it  would  be  practically 
impossible  to  bring  these  things  together  in  their  proper  com- 
bination if  we  were  confined  to  simple  barter  as  the  only 
method  of  exchange,  we  can  clearly  see  that  money  is  the 
only  effective,  the  only  practicable  medium  by  which  they  can 
be  assembled  and  turned  into  active  capital.    Without  money 


m 


211]  MONEY  AND  MONEY  INTEREST  283 

iu  some  form  the  things  of  which  capital  is  made  up  might 
separately  be  brought  into  existence,  but  the  peculiar  com- 
binations by  which  they  become  active  capital  could  scarcely 
be  brought  about,  except,  perhaps,  in  a  communistic  society. 
In  an  individualistic  community  the  effective  aggregation  of 
the  things  of  tvMch  capital  is  made  up  is  possible  only  through 
the  medium  of  money. 

The  illustration  may  be  further  varied.  Suppose  a  cloth 
manufacturer  wants  to  borrow  some  additional  capital,  and  a 
friend  who  is  tanner  ofiTers  to  lend  him  some  of  his  capital 
consisting  of  tanned  hides.  He  would,  of  course,  decline  the 
offer.  The  tanned  hides  might  be  capital  to  a  shoe  manufac- 
turer, but  not  to  the  maker  of  cloth.  When  our  would-be  bor- 
rower is  in  need  of  capital,  he  does  not  want  an  indiscriminate 
lot  of  capital  goods.  He  wants  only  those  particular  things 
needed  in  his  business,  namely  the  things  he  is  prepared  to 
advance  toward  maturity.  Since  money  alone  will  enable  him 
to  obtain,  in  the  requisite  combination,  the  different  things  he 
needs,  he  will  borrow  money  and  not  capital  goods. 

The  specific  faculty  of  money  which  accounts  for  the  uni- 
versal demand  for  it  may  be  still  further  elucidated  by  the 
example  of  a  cloth  manufacturer  who  wants  to  get  a  number 
of  additional  looms  and  who  has  to  borrow  money  to  get  them. 
Here  three  persons  are  involved:  a  man  who  has  $10,000  to 
lend  out,"*^  a  manufacturer  who  owns  a  factory  worth,  say, 
$50,000,  the  capacity  of  which  he  desires  to  increase,  and  a 
machinist  who  has  a  stock  of  looms  worth  $10,000. 

The  manufacturer  now  borrows  the  $10,000  and  applies 
this  money  to  the  purchase  of  the  looms.  The  conditions  be- 
fore and  after  this  transaction  are  as  follows. 

Before  the  transaction  the  lender  held  a  claim  against  the 

"•  We  must  always  remember  that  money  is  in  essence  a  claim 
against  ita  issuer  which,  by  communal  convention,  is  recognized  as  a 
"right  to  a  certain  value  of  the  produce  of  the  country"  by  all  who 
have  anything  for  sale.  Ailhough  these  latter  are  not  the  debtors, 
they  are  ever  ready  to  satisfy  tlie  chiim  by  giving  goods  in  exchange 
for  it. 


284  DISTRIBUTION  OF  WEALTH  [211 

community  amounting  to  $10,000,  The  manufacturer  owned 
a  $50,000  factory.    The  machinist  had  a  stock  of  looms. 

After  the  transaction  the  lender  has  a  claim  against  the 
manufacturer  to  the  amount  of  $10,000  who,  in  turn,  is  in 
possession  of  a  $60,000  factory  of  which  he  owns  virtually  only 
five-sixths,  the  other  sixth  being  owed  to  the  lender.  In  place 
of  his  looms  the  machinist  has  nothing  more  than  a  claim 
against  the  community  amounting  to  $10,000.  It  is  further- 
more to  be  observed  that  from  now  on  the  manufacturer  is 
under  obligation  to  pay  interest  on  $10,000  to    the  lender. 

We  have  already  found  that  the  lender  receives  this  in- 
terest because  he  has  given  credit  which  is  money  in  exchange 
for  credit  which  is  not  money,  and  that  interest  is  paid  for 
the  advantage  afforded  by  money.  We  know  also  that  it  is 
not  paid  for  the  loan  of  capital  goods,  for  the  borrower  did 
not  get  the  looms  from  the  lender.  The  capital  which  the 
lender  gave  up  when  he  himself  got  the  money  was  given  to 
another  party,  and  when  giving  up  his  capital  goods  for  a  mere 
right  to  get  their  equivalent  in  other  goods  on  demand,  a  pay- 
ment of  interest  for  this  call  loan  was  neither  stipulated  nor 
expected. 

The  transaction  has  resulted  in  the  manufacturer  increasing 
his  active  capital  through  the  addition  of  looms,  and,  as  is  well 
known,  this  capital  yields  returns.  But  it  will  be  noted  that 
the  manufacturer  received  these  capital  goods  from  the  ma- 
chinist, and  not  from  the  lender.  No  one  but  the  machinist 
has  given  up  actual  products  of  labor  in  the  transaction.  He 
finds  it  necessary  to  give  up  the  looms,  which  are  real  capital, 
in  return  for  money,  a  mere  credit  instrument,  because  in 
the  course  of  specialized  production  his  looms  have  become  idle 
capital  to  him,  while  they  are  adapted  to  be  active  capital  only 
to  the  cloth  manufacturer.  By  means  of  the  borrowed  money 
the  looms  were  transferred  from  the  machinist  to  the  manu- 
facturer and  have  been  turned  from  an  idle  into  an  active 
state,  from  a  state  in  which  they  were  unable  to  yield  returns 
into  a  state  in  which  they  do  yield  returns.  This  conversion  is 
effected  through  the  peculiar  faculty  of  money  which  enables 
the  manufacturer  to  select  from  among  all  the  products  of 


2i£]  MONEY  AND  MONEY  INTEREST  285 

the  market  such  as  can  be  utilized  by  him  as  active  capital.  All 
this  conclusively  proves  that  interest  is  paid  for  the  loan  of 
money  because  money  has  the  faculty  to  convert  idle  into 
active  capital,  and  not  for  the  loan  of  capital  other  than  money. 
The  borrowed  money  was  not  the  means  for  transferring 
*'real"  capital  from  the  lender  to  the  manufacturer  (210), 
for  the  lender  did  not  have  that  capital  to  transfer,  and  the 
looms  which  the  manufacturer  received  belonged  to  the  ma- 
chinist, hence  the  lender  had  no  right  to  order  their  delivery. 
Nor  did  the  machinist  deliver  them  for  the  reason  that  the 
lender  of  the  money  had  previously  given  capital  goods  to 
some  one  for  the  money.  He  took  the  money  for  his  machines 
solely  because  the  money  possesses  a  certain  special  faculty. 
There  is  no  foundation  whatever  for  the  idea  that  the  function 
of  the  money  was  to  transfer  real  capital  from  the  lender  to 
the  borrower.  What  the  money  did  accomplish  was  to  turn 
the  idle  capital  of  the  machinist  into  active  capital  of  the 
manufacturer  through  the  process  of  selective  exchange.  The 
facts  unmistakably  indicate  that  interest  on  money  loans  is 
paid  for  the  use  of  that  faculty  of  money  which  enables  the 
borrower  to  select  in  the  market  the  particular  things  needed 
in  the  composition  of  active  capital. 

But  here  we  again  lose  the  thread  that  seemed  likely  to 
lead  us  out  of  the  maze.  In  order  to  account  for  the  readiness 
of  the  manufacturer  to  pay  interest  for  borrowed  money,  we 
had  to  fall  back  on  the  experience  that  active  capital,  that  is, 
capital  goods  employed  in  productive  processes,  yields  interest. 
But  what  it  is  that  imparts  this  power  to  capital  is  still  in- 
volved in  the  maze,  and  until  we  recover  the  thread,  we  cannot 
reach  a  conclusive  explanation  of  interest  itself  (2416). 

212.  Efficiency  of  Money. — Money  being  the  instrument 
for  turning  idle  capital  into  active  capital,  it  follows  that 
without  money  the  specialization  of  industiy  would  l)e  im- 
possible, and  all  the  a<lvantages  arising  from  systematized 
processes  of  industry  and  eoinmorce  would  be  unattainable. 

Let  us  consider  what  would  happen  if  we  had  to  get  along 
without   money  in  any  of  its  forms  and  depend  for  all  our 


286  DISTRIBUTION  OF  WEALTH  [213 

exchanges  on  simple  barter.  It  can  readily  be  seen  that  under 
such  conditions  practically  all  business  must  come  to  a  stand- 
still. Merchants  could  not  sell  their  goods  and  manufacturers 
could  not  pay  wages.  All  inventions  of  the  past  would  become 
useless,  and  we  would  relapse  into  a  state  of  primitive  life. 
Men  could  co-operate  only  in  those  simple  pursuits  in  which 
the  results  of  labor  could  be  shared  directly  among  the  par- 
ticipants, or  readily  exchanged  by  barter.  A  man  could  obtain 
bread  from  the  baker  or  meat  from  the  butcher  only  if  he 
chanced  to  have  something  of  which  the  baker  or  the  butcher 
happened  to  be  in  need  and  which  they  are  willing  to  accept 
in  exchange.  Since  development  of  industry  would  be  im- 
possible where  the  method  of  exchange  is  so  primitive,  we 
would  be  without  any  of  the  benefits  of  applied  science. 

Suppose,  now,  that  a  small  amount  of  money  were  intro- 
duced into  a  moneyless  community.  Exchanges  would  there- 
upon be  somewhat  facilitated  and  correspondingly  increased, 
and  a  limited  division  of  labor  would  naturally  be  developed. 
A  second,  a  third,  a  fourth  addition  to  the  amount  of  money 
would  permit  a  further  increase  of  commerce  and  the  ex- 
tension of  specialization  of  industry  to  a  corresponding  degree. 

The  first  instalment  of  money  would  naturally  seek  those 
channels  of  production  and  exchange  where  it  is  most  needed 
and  most  effective,  and  would  open  up  opportunities  for  the 
most  immediate  steps  in  the  division  of  labor.  The  second  in- 
stalment, finding  the  channels  of  the  first  order  filled,  would 
flow  in  directions  of  less  imperative  necessity,  or  channels  of 
the  second  order,  permitting  a  further  division  of  labor,  the 
advantages  being  not  quite  as  great  as  those  attained  through 
the  first  instalment.  A  further  addition  would  similarly  fill 
the  channels  of  the  third  order,  and  so  forth.  Each  successive 
addition  would  enable  producers  to  avail  themselves  of  more 
of  the  advantages  of  specialized  labor,  but  the  efficiency  of 
each  succeeding  instalment,  viewed  by  itself,  would  be  less 
than  that  of  the  preceding  one. 

213.  Final  Efficiency  of  Money. — It  is  clear  that  in  the 
above  illustration  each  new  addition  to  the  vohime  of  the 
medium  of  exchange  would  flow  into  the  most  important  chan- 


214]  MONEY  AND  MONEY  INTEREST  287 

nels  yet  open  and  would  permit  a  corresponding  degree  of 
further  development.  Just  as  the  available  supply  of  any 
class  of  commodities  is  used  for  the  most  important  require- 
ments, as  far  as  the  supply  goes,  so  the  available  volume  of  the 
medium  of  exchange  would  be  applied,  as  far  as  it  would  reach, 
to  those  uses  through  which  the  most  advantageous  specializa- 
tion of  work  is  attainable.  As  the  final  utility  of  any  class  of 
goods  is  determined  by  the  least  urgent  of  the  needs  that  can 
be  supplied  from  the  quantity  of  goods  available,  so  is  the  final 
efficiency  of  money  determined  by  the  least  remunerative  of 
all  the  industrial  developments  which  can  be  effected  by  means 
of  the  available  supply  of  money.  The  final  efficiency  of  money, 
then,  is  equivalent  to  the  benefit  afforded  by  the  last  of  the 
several  instalments  added  to  the  volume  of  money  (238). 

A  diagram  may  again  be  used  to  advantage  for  illustrat- 
ing this  principle.  Let  the  increasing  volume  of  money  be 
measured  on  the  horizontal  axis  and  the  efficiency  of  each  in- 
dividual instalment  on  the  vertical  axis  of  Fig.  22.  The 
gradual  decrease  of  the  efficiency  of  the  consecutive  instal- 
ments is  then  represented  by  the  descending  curve  EE'. 

When  the  gradually  increasing  volume  of  money  has 
reached  the  magnitude  OV,  the  efficiency  of  the  last  increment 
will  be  rated  by  the  ordinate  V'a',  while  the  efficiency  of  the 
total  volume  then  in  use  will  be  represented  by  the  area  OV'a'E. 
A  further  increase  of  the  volume  to  OF  will  reduce  the  final 
efficiency  to  the  rate  Va  and  at  the  same  time  increase  the 
efficiency  of  the  total  volume  of  money  to  the  area  OVaE. 

As  we  have  found  that  interest  is  paid  for  the  advantages 
afforded  by  money  in  its  capacity  as  a  medium  of  exchange,  it 
would  appear,  from  analogy,  that  the  rate  of  interest  is  some- 
how related  to  the  final  efficiency  of  money,  but  a  closer  in- 
vestigation of  that  which  actually  determines  the  interest  rate 
must  be  deferred  to  another  point  of  our  discussion  (244—256). 

214.  Significance  of  the  Phrase  "  Efficiency  of  Money." — 
111  the  aljove  arj^ument  we  have  gauged  the  ''efficiency  of 
money"  by  the  total  product  of  industiy  obtained  through 
the  employment  of  money.  But  the  fact  is  that  the  product  is 
a  result  of  several  co-ordinate  factors  of  which  money  is  but 


288  DISTRIBUTION  0¥  WEALTH  [214 

one.  It  is  clearly  unreasonable  to  give  credit  for  the  whole 
product  to  money  alone,  inasmuch  as  the  other  factors  are  at 
least  equally  indispensable.  Money  and  capital  goods  are 
equally  means  to  enable  labor  advantageously  to  exploit  land. 
The  phrase  "efficiency  of  money,"  as  we  have  used  it,  is  really 
the  measure  of  the  productivity  of  land,  labor,  capital  and 
money  combined,  and  since  we  have  yet  before  us  the  unsolved 
problem  of  the  relation  of  capital  goods  and  money  to  labor  and 
land,  the  term  should  really  be  understood  as  meaning  "effi- 
ciency of  labor,  capital  and  money  applied  to  land. ' ' 

But  the  final  efficiency  of  money  is  only  a  fraction  of  what 
we  have  above  considered  as  its  total  efficiency,  and  while  we 
have  as  yet  found  no  conclusive  proof  that  it  is  this  final 
efficiency  of  money  which  governs  the  rate  at  which  the  money- 
lender participates  in  the  division  of  the  wealth  produced,  it 
would  yet  appear,  from  analogy,  that  such  is  the  case.  Turn- 
ing to  our  diagram  Fig.  22,  we  find  that  if  OF  were  the  volume 
of  money,  and  producers  were  obliged  to  borrow  all  of  this 
money  from  lenders,  they  could,  by  its  aid,  and  with  the  total 
labor  and  capital  other  than  money  which  they  have  at  com- 
mand, attain  a  yearly  output  represented  by  the  area  OVaE, 
of  which  output  they  must  pay  a  part  equal  to  the  area  OVai 
as  interest  for  the  money,  retaining  for  themselves  the  re- 
mainder iaE,  to  be  shared  between  labor  on  the  one  hand  and 
employed  capital  other  than  money  on  the  other. 

However,  until  we  make  ourselves  fully  familiar  with  the 
forces  that  determine  the  volume  of  money,  the  problem  will 
not  have  passed  the  indeterminate  stage.  We  have  found 
(195)  reasons  to  suppose  that  a  deficiency  of  available  capital 
goods  accounts  for  the  power  of  capital  goods  to  command  in- 
terest income,  and  now  we  find  that  a  deficiency  of  available 
money  appears  likewise  to  account  for  the  similar  power  pos- 
sessed by  money.  The  ground  is  thus  cleared  for  further 
inquiry  into  the  nature  of  interest  and  into  the  causes  which 
determine  the  division  of  wealth  between  capital  and  labor. 


CHAPTER  XII 
CHANCE  PROFITS  AND  LOSSES 

215.  Chance  as  an  Economic  Factor. — When  the  science 
of  economics  is  studied  by  purely  analytical  methods,  it  is 
necessary  to  leave  out  of  account  all  factors  of  a  temporary 
nature  and  to  confine  the  inquiry  to  those  governing  forces 
whose  influence  is  continuous.  Reverting  to  our  illustration 
of  the  marksman  (1)  as  an  analogy,  we  must  leave  out  of 
account  the  unsteadiness  of  his  arm  and  other  variable  in- 
fluences that  tend  to  scatter  the  shots.  While  conclusions 
reached  in  this  way  are  not  borne  out  in  individual  cases,  they 
are  nevertheless  tnie  as  regards  the  general  average.  Though 
in  following  this  plan  we  are  chiefly  concerned  with  general 
conditions,  it  is  yet  desirable,  at  this  point,  to  give  some 
attention  to  the  effect  of  passing  influences. 

We  have  all  along  taken  for  granted  a  number  of  sup- 
positions which  are  not  entirely  in  accord  with  facts  as  we 
really  find  them.  The  individual  has  been  credited  with 
accurate  knowledge  and  sound  judgment  which  the  real  man 
never  possesses.  Every  workman  has  been  supposed  to  Imow 
his  earning  capacity,  not  alone  in  his  actual  occupation,  but 
aLso  in  the  occupation  to  which  he  can  turn  as  an  alternative, 
his  occupation  of  second  choice  (61),  and  has  always  been 
assumed  to  choose  that  course  of  action  which  is  most  ad- 
vantageous to  him.  Prices  of  the  same  kind  of  things  at  differ- 
ent points  in  the  same  market  were  considered  to  be  equal  and 
known  to  all  buyers  and  sellers.  Moreover,  we  have  omitted 
to  take  into  account  numerous  chance  disturbances  in  the 
domain  of  production  and  exchange.  Weather  conditions  in- 
troduce marked  uncertainty  into  agriculture,  transportation 
and  many  other  pursuits,  and  risks  in  endless  forms  are  en- 
countered in  every  walk  of  life.  Even  a  more  change  in 
fashion  may  boom  one  business  and  ruin  another. 

In  the  measure  in  which  the  actual  conditions  attending 
19  289 


290  DISTRIBUTION  OF  WEALTH  [216 

individual  cases  differ  from  those  which  we  have  assumed,  the 
actual  outcome  of  a  given  set  of  causes  varies  from  what  other- 
wise could  be  reasonably  anticipated.  However,  as  regards 
the  entire  province  of  production  and  exchange,  these  varia- 
tions, in  accordance  with  the  law  of  probability,  tend  to 
balance  each  other  in  the  same  way  as  the  shots  of  a  marks- 
man on  one  side  of  the  bull's-eye  are  practically  balanced  by 
those  on  the  other.  These  departures  from  the  average  in 
individual  cases  result  in  chance  profits  or  losses  to  individuals 
(139). 

With  a  view  to  systematize  our  brief  survey,  we  may 
roughly  divide  profits  of  chance — be  they  positive  or  negative, 
profits  or  losses — into  those  that  are  due  (1)  to  fortuitous 
changes  of  value,  (2)  to  the  varying  outcome  of  risks  assumed 
and  (3)  to  economic  inertia. 

216.  Profits  and  Losses  from  Changes  in  Value. — It  is  a 
current  saying  that  both  parties  to  an  exchange  make  a  profit 
thereby.  But  this  betokens  a  confusion  of  the  idea  of  utility 
with  that  of  value,  inasmuch  as  each  party  to  an  exchange  of 
things  of  equal  market  value  gets  only  that  which  is  more  useful 
to  him  for  something  that  is  less  useful  to  him. 

According  to  the  definition  of  "value"  two  things  are 
economically  equal  if  they  are  exchanged  in  the  market  one 
for  the  other.  The  fact  of  their  being  exchanged  simply  estab- 
lishes their  equality,  but  in  no  way  adds  anything  to  their 
existing  value.  The  value  of  things  may  be  increased  by  the 
work  of  carriers  or  merchants  before  or  after  an  exchange, 
and  this  increase  is  often  mistakenly  regarded  as  being  brought 
about  by  the  exchange  itself. 

Changes  in  the  value  of  things  may,  however,  take  place 
without  any  efi^ort  whatever  on  the  part  of  the  owners  of  the 
things,  and  it  is  generally  supposed  that  profits  derived  by  the 
owners  from  such  a  change  in  market  values  are  not  attended 
by  a  loss  to  anyone. 

This  view  is  erroneous,  as  may  be  gathered  from  the  fact 
that  by  a  mere  fortuitous  change  in  the  value  of  a  thing  the 
sum  total  of  all  wealth  is  neither  increased  nor  decreased,  and 


216]  CHANCE  PROFITS  AND  LOSSES  291 

that,  accordingly,  any  gain  in  wealth  by  one  individual  due 
merely  to  an  increase  of  the  value  of  a  thing  he  owns  must  re- 
sult in  a  loss  to  the  rest  of  the  community.  But  if  there  is  such 
a  loss,  it  should  be  possible  to  point  out  how  it  arises  and 
whether  it  falls  on  the  whole  community  or  only  on  one  or 
more  of  its  members. 

We  can  here  consider  only  gains  and  losses  that  are  realized 
through  a  double  exchange,  such  as  buying  a  thing  at  a  low 
price  and,  after  its  value  has  changed,  selling  it  at  a  higher 
price.  A  man  holding  a  thing  while  its  value  rises  evidently 
cannot  gain  any  advantage  from  the  fact  that  its  value  did 
rise,  unless  he  sells  it  after  its  value  has  risen.  Where  the  change 
in  value  comes  about  without  some  service  being  rendered, 
it  can  easily  be  shown  that  a  profit  accruing  to  anyone  through 
buying  a  thing  cheap  and  selling  it  dear,  is  invariably  attended 
by  a  corresponding  loss  to  others,  and,  of  course,  vice  versa. 

Let  us  suppose,  for  example,  that  A  has  three  hats,  while 
B  and  C  have  each  four  dollars.  If,  then,  C,  with  his  four 
dollars,  buys  the  three  hats  from  A  and,  turning  around,  sells 
two  of  them  to  B  for  two  dollars  each,  he  will  have  a  hat  in 
addition  to  the  four  dollars  he  had  before.  This  hat  con- 
stitutes a  profit  which,  as  we  shall  presently  see,  has  entailed 
a  loss  upon  others.  By  grouping  A  and  B  we  find  that,  at  the 
start,  they  owned  three  hats  and  four  dollars,  and  subsequently 
only  two  hats  and  four  dollars.  It  is  therefore  apparent  that 
by  the  operation  through  which  C  profited  a  hat,  A  and  B  con- 
jointly have  lost  it  (224,  277).  It  is,  however,  impossible  from 
these  data  to  determine  to  what  extent  each  of  them  is  a  loser, 
since  dollars  and  hats  are  dissimilar  things. 

The  proposition  here  outlined  has  no  bearing,  of  course, 
on  cases  of  a  possible  change  in  the  usufnict  of  a  thing,  as  when 
the  thing  in  (|uestion  is  land  or  invested  capital,  such  as  stocks 
in  some  enterprise.  A  rise  of  rents  or  of  dividends  is  a  phe- 
nomenon that  must  be  relegated  to  the  problem  of  rent  or  of 
capital  interest,  and  has  no  place  in  the  consideration  of  chance 
profits.  If,  however,  such  a  rise  in  the  usufruct  is  attended 
by  a  rise  in  the  value  of  the  land  or  of  the  stocks,  such  a  rise 
comes  properly  within  the  province  of  the  present  discussion. 


292  DISTRIBUTION  OF  WEALTH  [217 

for  any  fortuitous  occurrence  that  results  in  a  change  in  the 
market  value  of  anything  brings  that  change  within  the  scope 
of  the  above  conclusion. 

In  these  cases,  however,  the  way  in  which  the  loss  corre- 
sponding to  a  profit  so  gained  becomes  imposed  on  others  is 
not  so  easy  to  trace.  It  is  even  held  by  many  that  by  a  rise 
in  land  values  the  wealth  of  a  community  is  increased  and 
that  profits  arising  therefrom  cannot  entail  losses  on  others. 
The  error  of  this  view  will  be  shown  later  (329). 

217.  Profits  to  be  Distinguished  from  Wages. — In  the 
above  illustration  it  must  be  understood  that  what  C  gains 
constitutes  a  loss  to  A  and  B  only  if  C,  through  his  intermedia- 
tion, has  not  rendered  some  service  to  the  others.  If  C  is  a 
dealer  whose  efforts  are  given  to  the  work  of  transferring  hats 
from  producer  to  consumer,  his  gain  is  not  a  profit,  but  a 
wage  for  his  labor,  for  he  earns  the  difference  between  the 
purchase  and  the  selling  price. 

Retailing  is  a  necessary  step  in  the  process  of  production 
and  distribution,  and  requires  labor.  Production  without  dis- 
tribution is  an  incomplete  process,  and  the  work  of  retailing, 
which  completes  the  process,  is  an  indispensable  step  in  the 
specialization  of  labor  and  must  be  paid  for. 

The  middleman,  so  often  denounced  as  a  useless  member 
of  society,  performs  this  important  function,  which  certainly 
can  be  performed  most  economically  through  specialization. 
The  mere  placing  of  hats  in  a  store  where  the  customer  can 
conveniently  choose  size,  style  and  quality  desired,  adds  to  the 
value  of  the  hats  (12).  The  hats  sold  by  C  to  B  are  in  such 
case  more  valuable  than  when  C  bought  them  of  A,  and  the 
hat  gained  by  C  through  the  transaction  is  his  business  income. 
So  long  as  trade  is  open  to  competition,  the  business  income 
of  the  dealer  does  not  normally  exceed  wages  for  the  work 
performed  plus  rent  for  the  land  occupied  plus  returns  for 
the  capital  invested.  Chance  profits  may  or  may  not  form 
part  of  the  income,  but  they  are  likely  to  alternate  with  chance 
losses,  and  being  but  due  to  deviations  from  normal  conditions, 
are  negligible  when  general  conditions  are  considered. 


218. 219]         CHANCE  PROFITS  AND  LOSSES  293 

2i8.  Gambling. — The  chance  of  gaining  or  losing  through 
the  rise  or  fall  of  values  due  to  adventitious  circumstances  is 
an  unavoidable  risk  in  the  course  of  production  and  exchange. 
But  there  are  some  classes  of  risks  which  are  quite  outside  of 
the  range  of  normal  business.  Stock  speculation,  gambling 
and  taking  lottery  chances  are  illustrations.  Ventures  of  this 
nature  are  constantly  being  made,  even  though  none  of  these 
risks  affords  greater  chances  of  gain  than  loss,  and  most  of 
them  even  less,  for  some  fixed  cost  must  in  any  event  be  paid 
out  of  the  stakes  of  the  speculators.  The  fact  that  not  a  few 
people  are  constantly  taking  such  chances  is  widely  at  variance 
with  the  assertion  of  some  economists  that  men  would  not 
take  risks  unless  the  chances  of  gain  exceed  the  chances  of  loss. 

219.  The  Element  of  Risk. — We  have  hitherto  recognized 
three  essential  factors  on  which  the  amount  of  the  products 
of  industry  primarily  depends,  namely  labor,  land  and  capital 
goods.  There  are,  however,  other  factors  that  enter  into  the 
case,  but  these  have  a  merely  modifying  effect.  In  agricultural 
pursuits  the  uncertainty  of  the  weather  affects  the  amount 
produced  by  a  given  expenditure  of  effort.  Those  who  deal 
in  perishable  products  often  lose  a  portion  of  their  goods  by 
decay  (58).  In  most  industrial  operations  there  is  a  greater 
or  less  amount  of  waste  through  causes  which  cannot  be 
entirely  eliminated  (13),  Large  amounts  of  wealth  may  be 
destroyed  in  a  few  hours  by  fire,  flood  or  earthquake. 

Losses  of  this  nature  become  virtually  a  tax  on  production 
and  are  naturally  followed  by  a  corresponding  increase  in  the 
price  of  the  commodities  affected  (139,  149).  Although  the 
extent  of  such  losses  in  individual  cases  varies  greatly,  the 
average  for  different  periods  is  approximately  constant  for 
each  specific  phase  of  risk,  and  it  is  this  average  which  enters 
as  an  item  into  the  price  of  the  product.  The  average  losses 
through  i-isks  in  production  and  distribution  are  therefore 
borne  by  the  consumers  of  the  products. 

Whenever,  in  any  individuMl  case,  the  losses  actually  sus- 
tained through  ordinary  risks  hapix'n  to  be  less  than  the  aver- 
age which,  as  we  have  just  seen,  is  covered  in  the  price  and 


294  DISTRIBUTION  OF  WEALTH  [220 

paid  for  by  the  consumers,  a  chance  profit  is  gained  by  the 
producer;  and  whenever  the  actual  losses  exceed  the  average, 
a  chance  loss  is  suffered.  While  in  individual  cases  either 
gains  or  losses  may  predominate,  the  general  trend  is  to  a 
balance. 

In  the  ordinary  course  of  production  and  distribution  the 
workers,  the  landlord  and  the  capitalist  receive  their  re- 
spective shares  at  the  current  rate  of  wages,  rent  and  interest, 
and  any  gains  or  losses  due  to  chance  departures  from  the 
average  fall  to  the  one  who  holds  the  position  of  venturer 
(144). 

220.  Insurance. — Some  losses,  like  those  from  fire,  hail  or 
shipwreck,  are  of  comparatively  infrequent  occurrence,  but 
when  such  accidents  do  happen,  the  losses  are  usually  heavy. 
For  the  purpose  of  equalizing  these  losses  as  nearly  as  pos- 
sible among  all  who  are  exposed  to  the  same  risk,  various 
systems  of  insurance  have  been  organized.  The  payment  for 
the  insurance,  known  as  the  ' '  premium, ' '  is  calculated  to  make 
good  the  average  of  all  losses  covered  by  the  insurance  and  to 
pay  for  all  service  required  in  the  maintenance  of  the  system. 
The  cost  of  insurance  becomes  an  item  of  the  cost  of  production 
and  distribution,  which  through  competition  becomes  a  part 
of  the  price  at  which  the  products  or  services  are  marketed 
and  is  therefore  paid  by  the  consumers  (149). 

It  follows  that  whether  the  risk  is  insured  or  is  not  insured, 
the  fact  of  its  existence  causes  an  increase  of  the  market  price 
of  all  products,  in  proportion  as  these  products  are  affected. 

The  lending  of  money  is  subject  to  a  risk  of  loss  due  to  the 
occasional  failure  of  debtors.  At  a  former  point  of  our  dis- 
cussion (139)  we  have  seen  that  this  risk  is  usually  a  subject 
of  insurance,  for  the  interest  payable  on  loans  contains  an 
item  in  the  nature  of  an  insurance  premium.  By  receiving 
this  premium  the  lender  assumes  the  position  of  insurer. 
This  applies  particularly  to  banking  institutions  generally.  A 
bank  is  in  fact  an  intermediary  agent  between  its  depositors 
and  its  borrowers,  and  the  risk  involved  in  the  lending  of  the 
depositors'  money  is  borne  by  the  bank.  The  losses  arising 
from  the  failure  of  some  of  the  borrowers  are  made  good  out 


2ii]  CHANCE  PROFITS  AND  LOSSES  295 

of  that  portion  of  the  interest  paid  by  all  borrowers  which 
constitutes  the  insurance  item.  The  borrowers  as  a  class  have 
to  pay  for  the  delinquencies  of  those  among  them  who  fail, 
the  bank  acting  in  the  capacity  of  insurer  (102,  263,  290). 

221.  Economic  Inertia. — The  factors  which  determine 
prices  in  the  industrial  world  are  subject  to  never-ending 
changes.  Both  demand  and  supply  are  influenced  by  various 
causes.  Demand  is  affected  mainly  by  the  inconstancy  of  hu- 
man desires,  which  often  change  for  purely  psychological 
reasons,  as  when  new  fashions  supplant  the  old.  The  changes 
in  the  supply  are  principally  due  to  advances  in  science  and  the 
arts,  whereby  the  efficiency  of  labor  is  increased  and  the  cost 
of  production  correspondingly  reduced. 

By  reason  of  these  variations  in  both  intensity  of  desires 
and  cost  of  production  it  often  happens  that  final  utility  and 
marginal  cost  of  production  become  temporarily  unequal. 
Prices  are  then  regulated  by  final  utility  alone,  and  not  by 
cost.  And  owing  to  what  is  known  as  "economic  inertia,"  it 
takes  more  or  less  time  for  the  market  to  become  adjusted  to 
the  changes  above  indicated.  The  result  of  this  inertia  may 
be  studied  by  diagram. 

Let  the  curves  SS'  and  DD'  of  Fig.  23  represent  respect- 
ively the  sellers'  and  the  buyers'  price  limits  at  a  given 
moment.  The  market  having  adjusted  itself  to  these  condi- 
tions, the  price  will  be  e(iual  to  qa  and  the  rate  of  production 
equal  to  Oq.  Suppose  now  that  through  an  invention  the 
cost  to  the  producers  is  reduced  to  the  level  of  TT'  and  that  a 
change  of  fashion  has  stimulated  the  demand  to  the  level  of 
EE'.  Production  being  for  the  moment  at  the  rate  Oq,  the 
final  utility,  and  hence  the  current  value,  rises  from  qa  to  qh, 
while  the  marginal  cost  of  production  falls  from  qa  to  qc.  The 
actual  supply  being  Oq,  the  momentarv^  sellers'  price  limit 
cannot  extend  beyond  the  point  c,  and  the  price  of  the  com- 
modity rises  to  tin-  intersection  h  of  llic  sellers'  price  limit 
Teh  with  the  buyers'  price  limit  EE'.  The  price  becomes 
equal  1o  qh,  while  the  marginal  cost  is  only  equal  to  qc.  The 
pro(luf<'rs  favored  by  this  condition  reaj)  a  chance  profit,  and 


296  DISTRIBUTION  OF  WEALTH  [222 

this  has  the  effect  of  attracting  others  to  this  occupation.  Pro- 
duction becomes  eventually  increased  to  the  rate  of  Oq',  the 
point  of  intersection  d  becomes  the  new  margin  at  which  cost 
and  utility  come  to  a  balance,  and  the  price  becomes  adjusted 
to  the  ordinate  q'd  (232). 

In  the  course  of  events  changes  of  the  opposite  nature  also 
take  place,  so  that  producers  are  confronted  either  by  a  falling 
price  or  by  increased  costs,  and  those  near  the  margin  suffer 
actual  loss.  They  are  then  forced  into  other  pursuits  and  the 
consequent  decrease  in  the  volume  of  production  finally  leads 
to  a  new  balance  of  marginal  cost  and  final  utility. 

In  reviewing  these  changes  of  the  market  we  may  broadly 
distinguish  three  conditions.  The  current  value  of  a  thing,  as 
determined  by  final  utility,  may  be  above,  equal  to,  or  below 
the  marginal  cost  (63).  In  the  first  case  production  is  un- 
usually profitable  and  becomes  increased  by  accessions  to  the 
ranks  of  the  producers.  In  the  second  case  final  utility  and 
marginal  cost  are  evenly  balanced,  and  the  relative  volume  of 
production  remains  stationary  (60).  In  the  third  case  pro- 
duction is  unprofitable  and  is  reduced  by  desertion  of  pro- 
ducers to  other  fields  (148).  The  normal  condition  is  that  of 
the  second  case.  In  the  first  and  the  third  case  the  current 
value  differs  from  the  normal  value,  but  competition  tends  to 
a  readjustment  in  which  final  utility  and  marginal  cost  are 
equalized. 

Profits  and  losses  resulting  from  such  conditions  can  arise 
only  during  a  limited  period,  namely  the  period  of  readjust- 
ment, during  which  they  continually  tend  to  diminish  and 
finally  cease  (149),  only  to  reappear  as  new  changes  develop 
which  affect  the  course  of  either  or  both  the  curves  *S'^'  and  DD'. 

A  period  of  readjustment  may  be  shorter  or  longer,  accord- 
ing to  circumstances.  There  are  several  well  defined  causes 
that  tend  to  prolong  this  period,  which  causes  may  be  classed 
under  the  headings  of  economic  inertia  and  economic 
momentum. 

222.  Factors  of  Economic  Inertia. — Workers  accustomed 
to  their  occupation  are  naturally  averse  to  making  a  change 
and  will  not  do  so  unless  the  disadvantages  under  which  they 


as]  CHANCE  PROFITS  AND  LOSSES  297 

labor,  or  the  advantages  offered  by  a  change,  overcome  their 
reluctance.  Readjustments  may  thereby  be  delayed,  but  they 
are  certain  to  come  about  in  the  end. 

Protracted  delays  are  apt  to  arise  from  the  fact  that  in  the 
production  of  many  things  a  considerable  interval  of  time 
elapses  between  the  beginning  of  the  work  and  its  completion. 
Prices  can,  of  course,  be  affected  only  after  the  products  are 
offered  in  the  market,  and  this  may  be  months  or  even  years 
after  the  first  steps  toward  the  increased  production  have 
been  taken.  Agriciilture  furnishes  an  obvious  example.  In 
other  cases  even  the  first  steps  toward  the  new  adjustment 
may  be  more  or  less  delayed.  When  a  new  invention  is 
brought  out,  it  may  often  be  less  wasteful  to  continue  the  use 
of  the  old  appliances,  even  at  a  disadvantage,  than  to  "scrap" 
them.  Those  in  use  are  then  retained  until  practically  worn 
out,  when  their  replacement  by  improved  appliances  will  no 
longer  involve  a  loss.  For  this  and  other  reasons  of  this  nature 
the  tran.sferrence  of  capital  from  one  channel  to  another  is 
even  more  sluggish  than  the  migration  of  labor. 

223.  Economic  Momentum. — When,  for  any  reason,  some 
line  of  business  becomes  unremunerative  to  those  engaged  in  it, 
the  marginal  workers  will  be  the  first  to  turn  to  other  occupa- 
tions, thereby  lessening  production  in  that  line  and  gradually 
restoring  the  eciuilibriura  between  final  utility  and  marginal 
cost  of  production  (148).  When,  on  the  other  hand,  new  con- 
ditions cause  some  one  occupation  to  afford  unusual  profits, 
the  first  to  be  attracted  are,  in  general,  those  workers  who  are 
near  the  margin  in  their  respective  trades  and  who  can  readily 
turn  from  that  to  the  more  remunerative  field  (44).  A  slight 
change  in  the  price  will,  accordingly,  induce  only  a  limited 
number  of  workers  to  change  their  occupation,  and  the  market 
will  gradually  adjust  itself  to  the  new  conditions. 

Sometimes,  however,  the  adjustments  are  overdone,  only  to 
be  followed  by  reaction.  It  often  happens  that  some  innova- 
tion opens  up  an  unusually  promising  field  of  enterprise  for 
both  capital  and  labor,  with  the  result  that  more  producers 
are  attracted  to  this  field  than  are  warranted  by  the  actual 
demand.     This  situation   becomes   particularly  acute  where 


298  DISTRIBUTION  OF  WEALTH  [224 

the  enterprise  is  of  a  kind  which  requires  considerable  time 
for  preparation.  Since  an  increase  of  the  supply  cannot 
make  itself  felt  until  after  the  finished  products  are  offered 
in  the  market,  the  prospect  of  gain  continues  to  be  inviting, 
though  the  Gupply  in  preparation  is  already  greater  than 
the  demand  justifies.  The  natural  result  is  a  supply  greater 
than  the  demand  and  a  consequent  more  or  less  disastrous  fall 
in  the  price  of  the  product  in  question. 

As  a  pendulum  is  carried  by  its  momentum  from  one  ex- 
treme to  the  other,  so  may  the  market  swing  from  an  over- 
balance of  demand  to  an  over-balance  of  supply,  and  some  who 
are  furnishing  the  supply,  instead  of  reaping  profits,  suffer 
loss. 

224.  The  Law  of  Chance  Profits. — Among  the  profits  so 
far  considered,  those  of  chance  are  the  only  ones  that  are  not 
in  the  nature  of  recompense  for  some  form  of  service.  All 
other  forms  of  income,  namely  wages,  rent,  capital  returns  and 
interest  on  money,  are  determined  by  specific  economic  forces, 
by  reason  of  which  they  approximate  a  definite  rate.  Though 
the  causes  which  determine  the  division  of  net  incomes  into 
wages  and  capital  profits  are  yet  to  be  examined  in  our  further 
investigation,  we  know  at  least  from  experience  that  wages  and 
capital  profits  have  the  tendency  to  reach  a  certain  relative 
rate,  however  this  rate  may  differ  with  time  and  place.  But, 
as  regards  chance  profits,  theory  as  well  as  experience  in- 
dicates that  their  tendency  is  always  toward  a  balance  with 
chance  losses  (138,  216). 

It  has  been  stated  before  that  chance  profits  accruing  to  a 
productive  group  go  to  the  venturer  (144).  It  is  however 
often  difficult  to  decide  whether  certain  items  of  the  income 
of  a  group  are  due  to  chance  or  to  efficient  management.  The 
impossibility  of  deciding  whether,  in  any  given  case,  a  certain 
item  should  be  classed  as  wages  of  the  manager  or  as  profits  of 
the  venturer  cannot  gainsay  our  conclusion  that  chance  profits 
invariably  tend  to  balance  chance  losses. 


PART  III 

RESTRAINTS  ON  INDUSTRY 


CHAPTER  XIII 
MONOPOLY 

225.  Economic  Impediments. — Of  the  economic  factors 
which  affect  the  distribution  of  the  fruits  of  industry  among 
those  who  participate  in  production,  one  class  has  so  far  been 
left  out  of  account.  To  make  our  investigation  complete,  we 
shall  now  take  up  that  remaining  class.  This  brings  us  to  the 
consideration  of  customs  and  of  laws,  in  so  far  as  tliey  pro- 
mote or  retard  the  working  of  purely  economic  forces. 

Our  past  conclusions  were  based  in  general  on  the  assump- 
tion of  a  freedom  of  competition.  But  such  freedom  has  never 
existed  and  does  not  now  exist  (150).  The  free  play  of 
economic  forces  is  hampered  by  social  conventions  of  all 
kinds,  which  remain  with  us  as  inherited  from  the  ignorance, 
the  prejudices  and  the  superstitions  of  bygone  times.  Out  of 
these  grew  various  systems  of  caste,  the  traces  of  which  are 
yet  clearly  apparent  in  society.  "We  have  indeed  outlived  the 
most  barbarous  forms  of  these  systems,  such  as  slavery  and 
serfdom,  but  many  of  the  economic  conditions  growing  out 
of  the  social  organization  of  the  feudal  ages  continue  prevalent 
to-day  in  the  form  of  laws  designed  to  regulate  industry,  com- 
merce and  exchange,  as  well  as  laws  creating  monopolies 
through  special  privileges  and  franchises. 

In  current  discussions  the  tenn  "monopoly"  has  come  to 
be  used  with  so  much  looseness  that  we  must  here  explain  and 
define  the  sense  in  which  it  should  properly  be  understood. 

Literally  the  word  "monopoly"  signifies  a  sole  right  or 
sole  power  to  sell.  By  most  writers  on  economics  the  term  is 
held  to  include  all  fonns  of  economic  right  or  power  of  an 
exclusive  nature.  Popularly  the  term  is  however  often  applied 
to  the  more  or  less  complete  control  of  production  and  ex- 
change acquired  by  various  industrial  and  commercial  con- 
cerns in  their  respective  fields,  a  control  usually  attributed  to 
their  manipulation  of  the  market;  but  such  use  of  the  term 
can  only  lead  to  confusion  and  should  therefore  be  avoided. 

301 


302  RESTRAINTS  ON  INDUSTRY  [226-228 

226.  Monopoly  Implies  Restraint. — A  monopoly  is  to  be 
regarded  as  an  exclusive  economic  right,  the  essence  of  which 
is  really  a  special  exemption  from  a  general  restraint.  It  is 
this  restraint  which  is  the  positive  element  of  monopoly  (18). 
The  power  of  restraint  is  generally  exercised  by  the  organized 
community  through  forms  of  law,  but  individuals  or  organized 
groups  often  seek  to  put  it  into  effect  with  the  object  of 
acquiring  a  monopoly  for  themselves. 

There  are  two  distinct  forms  of  monopoly,  which  may  be 
designated  as  * '  personal ' '  and  ' '  impersonal. ' '  The  distinction 
lies  in  that  the  one  depends  on  a  restraint  imposed  by  a  con- 
trolling power  upon  all  but  a  limited  number  of  specified  per- 
sons, while  the  other  depends  on  a  limitation  placed  on  the 
production  or  use  of  certain  things. 

227.  Ethics  of  Monopolies.— There  is  a  generally  prevail- 
ing idea  that  monopoly  is,  in  its  very  nature,  an  injustice  to 
the  community  at  large.  But  this  is  by  no  means  always  the 
ease.  There  are  several  forms  of  exclusive  right  which  are 
fundamentally  just  and  which,  for  this  reason,  are  proper 
subjects  of  legal  protection.  Of  this  class  patent  and  copy 
rights  are  notable  examples.  Monopoly  in  itself  can  do  no 
harm;  it  is  only  when  it  is  inequitable  in  its  relation  to  the 
community  that  it  becomes  detrimental. 

Equity  is  satisfied  M^henever  an  exclusive  right  is  granted 
in  return  for  the  performance  of  an  equivalent  dutj^,  or,  to 
put  it  in  other  words,  whenever  that  which  the  community 
receives  for  the  grant  is  an  equivalent  of  that  which  it  gives. 

Government  is  supposed  to  bestow  impartially  protection 
and  rights  and  to  impose  the  corresponding  duties  on  all 
members  of  the  community.  But  the  fact  is  that  governments 
have  often  granted,  and  still  continue  to  grant  to  individuals 
or  to  groups  rights  and  privileges  which  are  distinctly 
disadvantageous  to  the  community.  It  is  impossible  under 
this  policy  to  avoid  the  development  of  class  distinctions  and 
antagonisms. 

228.  Ownership  a  Form  of  Monopoly. — The  most  impor- 
tant of  all  exclusive  rights  is  that  of  private  ownership.  This 
is  not  usually  regarded  as  a  monopoly,  but  since  it  possesses 


229]  MONOPOLY  303 

all  the  elements  of  mouopoly,  it  cannot  logically  be  excluded 
from  that  category  of  rights.  The  owner  of  a  thing  is  the 
only  one  who  may  rightfully  use  it  or  dispose  of  it,  and  the 
community  restrains  all  its  other  members  from  interfering 
with  that  right. 

The  nature  of  this  right,  its  justice  and  equity,  have 
already  been  amply  discussed  (20,  21). 

229.  Patent  and  Copy  Rights. — Patent  and  copy  rights 
differ  in  one  essential  respect  from  the  right  of  ownership  in 
things.  They  are  not  exclusive  rights  of  possession  of  specific 
things,  but  exclusive  rights  of  producing  and  vending  a  speci- 
fied hind  of  things. 

Patents  are  granted  to  individuals  who  invent  new  means 
or  discover  new  processes  of  production.  They  are  enforced 
by  the  legal  restraint  placed  upon  the  rest  of  the  community 
against  the  production  and  sale  of  the  thing  patented.  A 
patent  is  really  a  compact  between  the  inventor  and  the  com- 
munity. The  inventor  gives  to  the  community  a  full  de- 
scription of  his  invention,  and  in  return  the  community 
pledges  itself  to  protect  the  inventor  for  a  certain  number  of 
years  in  the  exclusive  control  of  the  invention.  The  grant  of 
a  patent  is,  accordingly,  in  the  nature  of  a  recompense  for  a 
service  rendered. 

The  objections  that  have  been  urged  from  time  to  time 
against  patent  laws  are,  as  a  rule,  due  to  a  widespread,  though 
unfounded,  antagonism  to  monopolies  generally.  A  patent 
being,  as  already  said,  merely  the  giving  of  one  service  in 
exchange  for  another,  the  granting  of  patents  is  fully  justified. 
And,  moreover,  the  monopoly  of  inventions  granted  by  the 
community  is  not  only  a  recompense  due  to  the  inventor,  but 
is  a  potent  stimulus  to  industrial  progress  and  thus  a  benefit 
to  the  community.  Inventions  generally  require  the  ex- 
penditure of  much  labor,  and  frequently  of  labor  of  an  ex- 
ceptional quality,  which  should  be  rewarded ;  and  the  most 
practical  as  well  as  the  most  rational  method  of  conferring 
this  reward  is  to  give  the  inventor  the  exclusive  right,  for  a 
limited  period,  to  exploit  the  invention  for  his  individual 
benefit. 

The  time  limit  of  a  patent  monopoly  is  an  important  factor 


304  RESTRAINTS  ON  INDUSTRY  [230. 231 

in  that  exclusive  right.  The  only  matter  that  may  be  open  to 
question  is  that  of  the  duration  of  the  patent.  This,  however, 
is  only  a  question  of  expediency.  If  the  time  is  too  short,  the 
inducement  to  invention  is  inadequate  and  progress  will  lan- 
guish. If  it  is  too  long,  the  public  loses  by  undue  postpone- 
ment of  the  time  when  the  production  of  the  thing  invented 
becomes  open  to  competition. 

Copyrights  on  productions  of  art  and  literature  are  given 
for  the  same  reasons  as  those  for  which  patent  rights  are 
granted,  the  work  of  artists,  authors  and  composers  being 
essentially  of  a  nature  similar  to  invention. 

The  monopoly  in  trade  marks  is  designed  to  protect  those 
whose  products  have  gained  a  valuable  reputation.  Through 
monopoly  in  the  use  of  a  name  or  a  mark  distinguishing  his 
goods  in  the  market,  the  owner  of  a  trade  mark  is  enabled  to 
reap  the  benefit  which  he  has  earned.  The  propriety  of  grant- 
ing such  monopolies  is  self-evident. 

230.  Land  Ownership. — The  right  of  land  ownership  is  in 
some  respects  essentially  different  from  the  right  of  owner- 
ship in  the  products  of  labor.  That  the  producer  of  a  thing, 
however  it  may  be  produced,  should  be  the  owner  until  he  dis- 
poses of  it  is  obvious ;  but  such  is  not  the  case  with  regard  to 
land,  since  land  is  an  elementary  part  of  nature  and  is  not  the 
product  of  labor. 

It  goes  without  saying  that  the  cultivator  of  land  should 
be  protected  in  the  ownership  of  the  fruit  of  his  labor.  For 
this  reason  the  initial  ownership  of  land  w^as,  and  in  all  new 
countries  generally  is,  accorded  to  the  first  settlers.  In  the 
course  of  time,  however,  as  population  increases,  the  economic 
relation  between  land  owners  and  the  community  becomes 
more  and  more  complex.  The  resulting  conditions  will  come 
up  for  consideration  in  connection  with  the  land  question,  to  be 
treated  in  a  subsequent  chapter  (323-333). 

231.  Franchises  Depending  on  the  Use  of  Land. — Some 
enterprises  are  of  such  a  nature  that  they  depend  for  their 
economic  existence  on  the  exclusive  use  of  public  land  for 
specific  purposes.  It  is  impracticable,  for  example,  to  give 
permission  to  everybody  indiscriminately  to  lay  water  or  gas 
mains  under  the  streets  of  a  city.    The  convenience  and  com- 


232]  MONOPOLY  305 

fort  of  having  water  and  gas  in  our  liomes  is  therefore  de- 
pendent on  what  is,  in  its  very  nature,  a  monopoly,  whether 
exercised  by  individuals  or  by  the  municipality  or  the  state. 
Another  case  of  the  same  description  is  that  of  monopoly 
rights  to  operate  street  cars  for  carrying  passengers.  Steam 
roads  are  monopolies  in  the  measure  in  which  the  construction 
of  competing  roads  depends  on  charters  from  the  government 
which  may  be,  and  for  obvious  reasons  in  many  cases  should 
be,  withheld. 

Franchises  of  this  description,  being  dependent  on  the  ex- 
clusive use  of  land  for  their  special  purpose,  are  closely 
related  to  the  right  of  ownership  in  land.  Their  final  con- 
sideration must  therefore  follow  the  discussion  of  the  land 
question  (334). 

232.  Impersonal  Monopolies. — What  we  have  denominated 
as  * '  impersonal ' '  monopoly  can  be  brought  about  through  im- 
pediments arbitrarily  imposed  on  production,  whereby  the 
amount  produced  is  limited  (238,  261).  For  example,  circum- 
stances may  arise  under  which  the  demand  for  certain  things 
exceeds  the  capacity  of  existing  means  for  producing  them, 
particularly  if  their  production  requires  special  appliances. 
For  the  time  being,  the  price  of  these  things  is  above  the 
marginal  cost  of  production,  and  profits  obtained  from  this 
source  are  of  the  nature  of  chance  profits  which,  as  we  have 
seen  (221),  tend  to  fall  away  if  competition  is  free.  But  if 
competition  is  forcibly  obstructed,  high  prices  will  continue, 
and  the  profits  in  such  case  must  be  classed  as  monopoly  profits. 

As  a  rule,  an  impersonal  monopoly  can  be  maintained  only 
so  long  and  so  far  as  the  obstruction  to  competition  is  eff'ective. 
Any  obstruction  of  this  nature  contrived  by  individuals  for 
selfish  ends  may  be  successfully  maintained  for  a  time,  but 
ultimately  competition  gains  the  upper  hand.  Only  if  com- 
petition is  restrained  by  law  or  Ijy  some  other  controlling 
influence  can  a  monopoly  of  any  kind  continue  to  exist 
indefinitely. 

The  workings  of  impersonal  monopolies  can  be  studied  by 
contrasting  them  with  monopolies  of  the  personal  type,  and 
this  may  be  done  by  reference  to  the  example  which  was  illus- 
trated by  the  diagram  Fig.  23.  In  this  example  we  assumed 
20 


306  RESTRAINTS  ON  INDUSTRY  [232 

that  SS'  and  DD'  are  the  initial  supply  and  demand  curves  of 
a  given  commodity  and  that  through  some  change  of  conditions 
the  curves  TT'  and  £E'  subsequently  took  the  place  of  the 
initial  curves.  The  capacity  of  production  having  before  the 
change  been  adapted  to  an  actual  supply  equal  to  Oq,  the 
final  utility,  after  the  change,  was  found  to  rise  from  qa  to  qh, 
while  the  marginal  cost  of  production  fell  from  qa  to  qc.  The 
resulting  profit  ch  accruing  to  the  marginal  producers  was 
recognized  as  an  incentive  to  that  immigration  from  other 
channels  of  production  through  which  ultimately  the  equi- 
librium was  restored.  In  this  process  of  readjustment  the 
amount  produced  was  found  to  increase  from  Oq  to  Oq'  and 
the  market  value  to  fall  from  qb  to  q'd. 

But  let  us  assume  that  in  this  industry  an  increase  of  pro- 
duction is  deliberately  prevented  and  the  actual  supply  kept 
at  Oq.  The  market  value,  as  determined  by  final  utility,  will 
then  remain  at  the  rate  qb,  and  the  gain  cb  of  those  engaged 
in  that  line  will  continue.  In  this  way  those  profits  which  we 
have  found  in  the  natural  order  of  things  to  be  due  to  chance 
and  subject  to  elimination  through  the  effect  of  competition, 
are  removed  from  that  influence  and  become  what  are  really 
monopoly  profits. 

Our  study  of  the  difference  between  personal  and  imper- 
sonal monopoly  can  now  be  completed.  Let  us,  for  illustra- 
tion, compare  the  case  where  a  given  article  is  patented  with 
that  where  the  supply  of  the  same  article  is  artificially  held 
down.  In  the  first  case  the  possessor  of  the  exclusive  right  to 
produce  and  sell  will  put  an  arbitrary  price,  say  Op',  on  the 
article,  and  the  conditions  of  demand  being  represented  by 
the  curve  EE\  he  will  be  able  to  sell,  at  this  price,  a  quantity 
equal  to  Oq.  In  the  second  case  we  may  assume  that  pro- 
duction is  deliberately  limited,  so  that  the  actual  supply  equals 
Oq,  when  the  final  utility,  and  with  it  the  price,  will  become 
equal  to  qb.  In  the  one  case  price  determines  quantity  de- 
manded, in  the  other  quantity  supplied  determines  price. 

The  effect  on  the  market  is  the  same,  whether  the  price  is 
determined  under  the  protection  of  a  patent  or  through  de- 
liberate limitation  of  the  supply.     In  either  case  the  price  to 


233. 234]  MONOPOLY  307 

the  consumer  is  maintained  above  a  competitive  level  only 
through  prevention  of  competition. 

233.  "  Cornering  "  the  Market. — A  "cornered"  market  is 
properly  to  be  regarded  as  an  example  of  a  monopoly  of  the 
impersonal  type,  since  it  is  brought  about  by  an  obstruction 
of  the  regular  channels  of  supply.  Such  attempts  at  monopoly, 
hoAvever,  meet  with  failure  far  more  frequently  than  is  gen- 
erally supposed.  Only  under  exceptional  circumstances  can 
such  interference  with  the  normal  course  of  supply  accomplish 
its  purpose.  Successful  attempts  of  this  kind  are  practically 
rare,  but  when  they  do  occur,  they  naturally  attract  a  large 
measure  of  public  attention,  while,  on  the  other  hand,  the 
failure  of  only  the  most  widespread  attempts  of  this  class  is 
brought  to  public  notice.  Efforts  to  corner  the  market  can- 
not, therefore,  have  any  more  than  a  passing  effect  on  economic 
conditions. 

In  so  far  as  labor  unions  succeed  in  obstructing  competi- 
tion, the  conditions  they  bring  about  are  akin  to  monopoly. 
But  monopolies  of  this  nature  cannot  be  discussed  intelligently 
until  after  the  cause  of  the  frequent  contentions  between  labor 
and  capital  has  been  more  fully  discussed  (268-276,  354-358). 

234.  Monopoly  Incomes. — The  essence  of  monopoly  being 
the  forcible  suppression  of  competition,  the  holder  of  a 
monopoly  is  enabled  to  obtain  higher  prices  than  would  rule 
in  a  competitive  market.  In  granting  public  utility  franchises 
it  is  not  unusual  to  place  some  restriction  on  the  price  to  be 
charged  for  services  rendered,  but  even  where  such  stipulation 
is  absent,  there  is  a  limit  to  what  the  holder  of  a  monopoly 
can  get. 

Let  us  take  the  case  of  a  patented  article.  The  patentee 
may  over-estimate  the  value  of  his  invention  and  set  a  price 
on  his  goods  which  no  one  is  willing  to  pay.  lie  will  then  not 
only  miss  his  opportunity,  but  will  also  deprive  the  com- 
munity of  any  bfuefits  which  might  l)e  derived  from  the 
invention.  Nor  could  the  inventor  derive  any  monopoly  profit 
by  sf'lling  the  article  at  cost,  that  is,  at  a  pric^e  whicli  would 
obtain  in  the  market,  were  the  article  not  patented.    In  order 


308  RESTRAINTS  ON  INDUSTRY  [234 

to  realize  such  a  profit,  he  must  therefore  offer  his  products  at 
a  price  somewhere  between  these  limits,  and  there  is  a  point 
at  which  his  income  will  be  greatest  under  the  existing  con- 
ditions (262).  We  may  again  have  recourse  to  a  graphical 
method  for  making  this  matter  clear. 

Suppose  that  the  curve  DB'  of  Fig.  24  represents  the  ae- 
mand  that  exists  for  the  patented  article  in  question,  while 
the  ordinate  of  the  horizontal  line  CC  represents  the  cost  per 
imit  of  making  and  selling  it,®^  If  the  inventor  were  to  sell 
the  article  at  the  price  Op',  he  could  sell  no  more  than  the 
({uantity  Oq'.  The  cost  of  making  this  quantity  equals  the 
quantity  multiplied  by  the  cost  of  each  unit  and  is  therefore 
represented  by  the  area  Op'c'C,  while  the  gross  receipts  from 
the  sale  would  amount  to  quantity  times  price,  represented  by 
the  area  Oq'a'p'.  Hence  the  monopoly  profits  would  be  the 
area  Cc'a'p',  namely  the  difference  between  cost  and  receipts. 
Had  the  patentee  made  his  price  equal  to  Op",  his  profits 
would  have  equalled  the  area  Cc"a"p".  In  both  cases  the  in- 
come from  the  monopoly  would  be  comparatively  small.  There 
is  obviously  a  point  in  the  range  of  prices  at  which  the  profits 
are  at  a  maximum,  and  it  can  be  shown  that  this  is  the  point 
a  where  the  angle  x  included  between  the  line  Ca  and  the 
horizontal  line  pa  equals  the  angle  y  which  is  included  between 
the  same  horizontal  line  pa  and  the  tangent  to  the  curve  DD' 
at  the  point  a.  Under  these  conditions  the  area  Ccap  measur- 
ing the  monopoly  profits  is  a  maximum. 

If  it  were  possible  in  any  specific  case  to  trace  the  actual 
curve  of  demand,  or  of  the  buyers'  price  limit  DD',  this  would 
be  a  convenient  method  for  enabling  the  patentee  to  find  the 
most  advantageous  price  at  which  to  sell  the  patented  article. 
But  since  this  cannot  be  done,  the  patentee  must  depend  upon 
his  judgment  and  experience  in  fixing  his  price. 

The  same  reasoning  is  of  course  applicable  to  all  forms  of 
monopoly,  their  economic  relation  to  the  general  market  being 
essentially  alike. 

When  monopolies  are  the  source  of  continuous  incomes 

"  In  view  of  the  fact  that  the  cost  of  producing  equal  quantities  is 
usually  less  as  the  quantity  produced  at  a  time  becomes  greater,  the 
line  CC  should  in  most  cases  really  be  a  descending  curve. 


235]  MONOPOLY  309 

throughout  the  duration  of  their  existence,  they  are,  in  several 
respects,  analogous  to  capital  goods.  A  franchise  possessed  by 
a  stock  company  figures  as  one  of  its  assets  and  gives  a  value 
to  the  stock  over  and  above  the  value  of  the  actual  property 
of  the  concern. 

235.  The  Power  of  Monopoly. — Judging  from  the  various 
suggestions  that  are  made  from  time  to  time  for  "curbing  the 
power  of  predatory  wealth,"  the  prevailing  idea  of  the  power 
that  can  be  wielded  through  monopoly  is  very  much  confused. 
The  idea  is  no  less  hazy  and  undefined  than  is  the  popu- 
lar notion  as  to  what  constitutes  a  monopoly.  The  power 
of  the  so-called  trusts  and  other  large  corporations  is  often 
attributed  to  a  monopolization  of  their  field,  while  in  reality 
it  is  due  to  an  extraordinary  and  peculiar  influence  of  wealth, 
the  nature  of  which  will  be  analyzed  in  its  proper  place  (241- 
243,  257-266).  "We  should  therefore  endeavor  to  get  a  correct 
insight  into  the  extent  to  which  the  power  of  monopoly  can  be 
carried,  and  the  effect  of  this  power. 

With  the  data  thus  far  presented  we  can  adequately  gauge 
the  sacrifice  which  the  community  makes  in  granting  monopoly 
rights,  and  the  power  which  is  therebj'^  placed  in  the  hands  of 
the  holder  of  the  monopoly. 

The  loss  which  the  community  really  sustains  depends  en- 
tirely on  the  way  in  which  the  monopoly  is  exploited.  The 
ca.se  of  a  patented  invention  may  again  serve  as  an  illustration. 
Should  the  invent<jr  sell  the  article  at  the  competitive  price  OC, 
Fig.  24,  the  community  would  obtain  all  the  benefit  as  though 
the  production  of  the  article  were  not  restricted  at  all.  This 
benefit  is  rei)r('sented  ])y  the  area  CAD.  If,  on  the  other  hand, 
tlic  article  is  offered  at  a  price  equal  to  or  exceeding  OD,  so 
that  no  sak's  will  be  made,  the  community  will  for  the  time  be 
deprived  oi'  any  good  which  they  mi-^ht  otherwise  reap  from 
Ihc  invention.  At  a  somewhat  lower  price  the  invention  is 
])laced  witliin  llie  roach  of  a  limited  number  of  users.  For 
example,  if  the  sales  are  made  at  the  ratc^  of  Op,  the  quantity 
sold  will  ])(•  Ofj,  and  tlie  excess  of  the  desire  for  the  goods  sold 
over  the  price  paid  is  represented  by  the  area  paD. 

AVlien  we  eompare  tliese  three  cases  and  note  llie  several 
effects  on  the  eoiiininnit\',  we  find  that  in  the  ease  where  a 


SIO  RESTRAINTS  ON  INDUSTRY  [235 

prohibitive  price  is  asked,  the  community  loses  all  the  benefit 
of  the  right  it  relinquishes,  and  this  is  the  greatest  privation 
that  can  possibly  be  incurred  through  the  grant  of  the  ex- 
elusive  right.  In  no  case  can  the  grant  of  a  monopoly  deprive 
a  community  of  more  than  the  benefits  it  would  derive  from 
its  own  exercise  of  the  right  in  question  (262). 

In  confirmation  of  this  statement  illustrations  could  be 
cited  by  the  hundreds,  but  one  may  suffice  to  show  the  prin- 
ciple. The  company  which  owns  the  Suez  Canal  holds  a 
monopoly  because  this  artificial  channel  of  commerce  is  the 
only  waterway  directly  connecting  the  Mediterranean  and  the 
Red  Sea.  Nevertheless  the  owners  cannot  exact  a  toll  higher 
than  the  cost  of  navigation  around  the  Cape  of  Good  Hope, 
and  were  they  to  demand  so  high  a  charge  the  commerce  of  the 
world  would  be  placed  on  the  same  basis  as  if  the  canal  had  not 
been  dug. 

To  be  sure,  the  power  of  monopoly  is  not  ordinarily  pushed 
to  a  prohibitive  extreme,  for  the  simple  reason  that  at  this 
point  no  advantage  can  be  gained  by  the  holder.  By  demand- 
ing a  reasonable  recompense,  the  owner  of  a  monopoly  right 
shares  the  benefit  of  the  monopolized  object  with  the  com- 
munity. Thus,  if  a  patentee  charges  a  price  for  the  patented 
product  corresponding  to  Op,  Fig.  24,  he  obtains  a  net  or 
monopoly  income  corresponding  with  the  area  Ccap,  while  the 
purchasers  enjoy  a  benefit  represented  by  the  area  paD. 

However  obvious  this  principle  is,  there  are  many  facts 
which  seem  to  be  at  variance  with  it.  We  hear  of  a  tobacco, 
of  a  sugar,  of  a  meat  trust,  and  these  are  charged  not  only 
with  exacting  a  tribute  from  all  the  users  of  their  products, 
but  also  with  crushing  their  competitors.  Yet  the  community 
has  granted  to  them  no  exclusive  right  to  carry  on  their  busi- 
ness ;  no  specific  restraint  is  placed  on  anyone  to  prevent  him 
from  entering  into  competition  with  them.  These  combina- 
tions evidently  wield  a  power  which  cannot  be  explained  by 
any  grant  of  exclusive  right  in  their  favor.  We  are  thus  con- 
fronted with  facts  which  appear  to  be  irreconcilable  with  our 
theory,  and  unless  this  discrepancy  can  be  cleared  up,  the 
theory  cannot  be  verified. 


CHAPTER  XIV 

THE  MONOPOLY  THEORY  OF  INTEREST 

236.  Usury  Laws. — Until  less  than  four  hundred  years 
ago  "usury,"  which  was  then  the  synonym  of  our  word  "in- 
terest," was  regarded  as  morally  wrong  and  was  universally 
condemned  as  unjust  and  oppressive,  Aristotle  describes  it  as 
unnatural,  the  Mosaic  law  forbids  it  and  in  this  respect  the 
early  Christians  accepted  the  Mosaic  teachings.  In  the  Middle 
Ages  the  doctrines  of  the  church  were  enacted  into  law,  and 
usury  was  forbidden  under  various  penalties.  Even  now,  the 
taking  of  interest  beyond  a  specified  rate  is  interdicted  in 
many  states  of  the  Union  as  well  as  in  several  European 
countries.  Such  laws  are,  however,  not  only  ineffective,  being 
often  evaded  by  various  subterfuges,  but  are  also  unreasonable. 
It  is  useless  to  repress  by  force  that  which  is  a  natural  outcome 
of  existing  economic  conditions.  Interest  is  either  justifiable, 
or  it  is  not  so.  If  interest  is  due  to  the  working  of  natural 
economic  forces,  if  it  is  an  inevitable  sequence  of  free  com- 
petition, then  all  laws  which  attempt  to  regulate  the  rate  of 
interest  are  invasive  and  therefore  unjust.  On  the  other 
hand,  if  interest  arises  through  an  arbitrary  interference  with 
the  working  of  natural  economic  forces,  if  it  is  a  sequence  of 
some  distortion  of  the  industrial  and  commercial  order  of 
things,  the  only  remedy  is  obviously  the  removal  of  the  dis- 
turbing influence.  The  cause,  and  not  the  result  should  be 
combated.  In  either  case  it  is  as  futile  as  it  is  irrational  to 
limit  the  rate  of  interest  by  legal  proscription. 

237.  Distinction  Between  Usury  and  Interest. — The  first 
effective  assault  on  laws  forbidding  interest  was  made  by  John 
(Jalvin  during  the  period  of  the  K<'formation.  As  we  have  had 
occasion  to  point  out  before  (100,  20-4),  he  attributed  the  in- 
terest paid  for  the  loan  of  money  to  the  income  deriv(>d  from 
hou.ses  or  fields  bought  with  the  money.  While  this  reasoning 
does  not  really  bring  to  light  the  cause  of  the  interest  coin- 

311 


312  RESTRAINTS  ON  INDUSTRY  [238 

manding  power  of  money,  it  paved  the  way  to  that  revision  of 
the  law  through  which  the  taking  of  interest,  at  least  within 
certain  limits,  was  sanctioned.  A  distinction  was  thereby 
established  between  '  *  usury ' '  and  ' '  interest, ' '  the  former  term 
being  confined  to  an  excessive  or  extortionate  rate. 

Calvin's  explanation  of  the  interest  commanding  power  of 
money  is  even  to-day  accepted  almost  without  challenge.  We 
have,  however,  found  ample  evidence  that  this  explanation  is 
essentially  unsound,  and  that  the  interest  paid  on  money  is 
really  paid  for  the  use  of  money  as  an  instrument  of  exchange, 
and  not  for  the  use  of  the  things  that  are  bought  with  it  ( 209- 
211).  We  should,  accordingly,  seek  to  discover  what  it  is  that 
gives  to  money  its  singular  power. 

238.  Money  Subject  to  an  Impersonal  Monopoly. — The 
part  which  money  plays  in  making  the  specialization  of  in- 
dustry possible  has  already  been  discussed  (211-213).  We 
have  also  found  reason  to  infer  that  the  interest  bearing 
power  of  money  is  related  to  the  final  efficiency  of  money,  and 
since  final  efficiency  can  be  conceived  only  with  reference  to  a 
definitely  limited  quantity,  we  should  now  acquaint  ourselves 
with  the  conditions  that  place  a  limit  on  the  volume  of  money. 

Let  us  make  a  comparison  between  that  which  limits  the 
supply  of  money  with  that  which  limits  the  supply  of  any 
commodity.  It  has  been  shown  (43)  that  in  general  the  supply 
of  commodities  is  limited  by  natural  conditions,  largely  by  the 
innate  reluctance  of  producers  to  exert  themselves  beyond  a 
certain  point.  The  production  of  any  given  commodity  is  con- 
tinued only  so  long  as  the  expected  utility  and  consequent 
gratification  is  considered  worth  the  effort.  For  this  reason 
final  utility,  and  with  it  the  price,  always  tends  to  adapt  itself 
to  marginal  cost  (62-64).  Does  this  principle  also  apply  to 
money  ? 

In  speaking  of  effort  or  cost  of  producing  money,  we  can 
here  mean  only  the  cost  of  converting  into  money  either  the 
substance  gold  through  the  process  of  coinage,  or  the  substance 
of  credit  through  the  process  of  banking.  The  cost  of  pro- 
ducing the  substance  of  which  the  money  is  constituted  is  not 


238]  MONOPOLY  THEORY  OF  INTEREST  313 

here  in  question,  for  this  has  bearing  on  the  exchange  value, 
the  purchasing  power,  of  money,  and  not  on  its  interest- 
bearing  power.  That  this  interest-bearing  power  is  related  to 
the  final  efficiency  of  money,  and  that  this  final  efficiency 
eciuals  the  benefit  afforded  by  the  last  instalment  of  its  volume 
has  already  been  shown  (213).  In  order  to  understand  why 
it  is  that  notwithstanding  the  high  final  efficiency  of  money 
further  instalments  are  not  forthcoming,  in  other  words,  what 
it  is  that  puts  a  limit  on  the  volume  of  money,  each  kind  of 
money  will  be  taken  up  in  turn. 

Beginning  with  gold  coin,  we  find  that  the  production  of 
such  currency  is  not  legally  limited.  All  gold  brought  in 
proper  quantity  to  the  mint  is  coined.  The  cost  of  doing  this 
work  is  borne  by  the  government,  hence  the  question  of  cost 
cannot  enter  as  a  deterrent  factor.  But  while  there  are  neither 
legal  restrictions  nor  economic  drawbacks  in  the  form  of  cost, 
the  amount  of  gold  brought  to  the  mint  is  wholly  insufficient 
to  provide  an  adequate  volume  of  currency.  The  volume  of 
gold  coin  is  manifestly  limited  hy  natural  conditions.  This  is 
true  even  though  the  amount  of  gold  produced  and  utilized  for 
money  is  steadily  increasing. 

The  second  form  of  our  currency,  consisting  of  legal  tender 
credit  tokens,  including  silver  dollars  and  subsidiary  coin,  is 
strictly  limited  hy  law.  In  this  case  law  does  that  which,  in 
the  first  case,  is  done  by  the  natural  scarcity  of  the  metal  gold. 
Also  in  this  case  there  is  no  item  of  cost,  since  the  cost  of 
issuing  that  currency  is  borne  by  the  government. 

Under  existing  law  national  bank  notes  are  ordinarily 
issued  only  against  federal  bonds  deposited  as  security  in  the 
national  treasury.  This  places  a  limit  on  their  use,  for  only  a 
certain,  though  possibly  variable,  amount  of  such  bonds  is  in 
existence,  ^loreover,  the  issue  of  these  notes  is  taxed,  which 
has  the  effect  of  a  cost  that  tends  to  restrain  the  issue  of  such 
notes. 

The  issue  of  emergency  national  hank  notes,  leased  on  se- 
curity other  tli.iii  bonds,  is  indeed  permitted  to  a  limited 
extent,  but  only  under  the  burden  of  a  gradually  increasing 
tax.    This  latter  provision  is  specially  designed  to  prevent  the 


314  RESTRAINTS  ON  INDUSTRY  [238 

issue  of  these  notes,  except  in  the  event  of  such  scarcity  of  the 
circulating  medium  as  will  drive  the  rate  of  interest  on  money 
far  above  the  usual  rate. 

Finally,  the  issue  of  notes  by  state  banks  is  subject  to  a 
federal  tax  of  ten  per  cent,  per  annum  and  is  thereby  prac- 
tically forhiclden. 

From  this  it  is  apparent  that  the  volume  of  our  currency  is 
arhitrarily  limited  by  law.  But  our  currency  is  not  our  only 
medium  of  exchange.  The  banking  system  enables  business 
credits  in  the  form  of  bank  checks  to  serve  this  office  (104a). 
It  is  often  claimed  that  the  check  system  permits  an  indefinite 
expansion  of  exchange  facilities,  enabling  the  total  volume  to 
adapt  itself  to  the  needs  of  commerce.  But  we  have  seen 
(1046)  that,  by  provision  of  banking  laws,  the  volume  of 
bank  credits  cannot  exceed  more  than  about  eight  times  °^  the 
amount  of  legal  money  held  as  reserve  in  the  banks,  and  since 
this  reserve  can,  in  the  nature  of  things,  be  only  a  fraction  of 
the  total  volume  of  legal  currency,  indeed,  according  to  sta- 
tistics, only  about  one-third  of  it,  we  find  that  the  limitation 
of  legal  currency  results  in  holding  down  the  volume  of  bank 
credit  within  a  limit  which,  though  not  sharply  defined,  is 
nevertheless  positive. 

This  limit  may  vary  from  several  causes.  First,  the  total 
volume  of  currency  in  the  country,  applicable  for  bank  reserve, 
is  variable,  principally  by  reason  of  the  variable  amount  of 
gold  in  the  country.  Second,  the  ratio  of  the  currency  held  in 
bank  reserves  to  the  total  volume  of  the  currency  is  variable, 
depending  largely  on  the  changing  phases  of  business  activity. 
This  causes  a  fluctuation  in  the  volume  of  bank  credit,  even 
while  the  volume  of  currency  remains  unchanged. 

It  is  held  by  some  that  the  field  of  exchange  facilities  is 
further  broadened  by  the  use  of  promissory  notes  given  in  pay- 
ment of  accounts.  But  this  is  not  so,  since  promissory  notes 
do  not  take  the  place  of  money  in  the  sense  in  which  bank 
credit  does.    They  are  not  adapted  for  general  circulation  and 

"This  ratio  may  be  affected  by  changes  in  our  currency  laws  or 
banking  practice. 


239]  MONOPOLY  THEORY  OF  INTEREST  315 

cannot,  for  this  reason,  facilitate  exchanges  to  any  great  ex- 
tent. As  an  addition  to  the  volume  of  the  mediiun  of  exchange 
they  are  a  negligible  quantity. 

These  considerations  plainly  show  that  while  the  volume 
of  gold  money  is  limited  by  natural  conditions,  the  volume  of 
credit  money  is  limited  by  certain  legal  enactments,  through 
which  the  issue  of  currency  is  specifically  restricted,  on  the 
assumption  that  such  limitation  is  necessary  for  the  protection 
of  the  note  holders  (264,  270). 

We  have  here  the  fundamental  difference  between  the 
supply  of  commodities  and  that  of  money.  While  the  pro- 
duction of  those  commodities  that  are  not  monopolized  in  any 
way  is  regulated  by  purely  economic  forces,  by  conditions 
which  naturally  arise  under  the  influence  of  free  competition, 
the  production  of  money  is  circumscribed  by  legal  enactments. 
By  this  arbitrary  regulation  there  is  created  an  impersonal 
monopoly  (232),  the  effect  of  which  we  shall  presently  analyze. 
While,  in  the  case  of  commodities,  the  production  of  which  is 
open  to  free  competition,  final  utility  and  marginal  cost  are 
normally  equal,  there  is  no  corresponding  equality  between  the 
final  efficiency  of  money  and  the  marginal  effort  or  cost  of 
converting  gold  or  credit  into  money. 

239.  The  Supposed  Danger  of  "  Inflation." — The  legal  re- 
striction of  the  amount  of  currency  is  prompted  by  the  fear  of 
grave  consequences  supposed  to  follow  enlarged  issues  of  cur- 
rency (320a).  The  supposed  effects  of  this  so-called  "in- 
flation" are  described  by  John  Stuart  Mill  as  follows  (285,  308, 
3206) : 

There  is  no  way  in  which  a  fjeneral  and  permanent  rise  of  prices, 
or,  in  other  words,  depreciation  of  money,  can  benefit  anybody,  except 
at  the  expense  of  somebody  else.  The  substitution  of  paper  for  metallic 
currency  is  a  national  gain;  any  further  increase  of  paper  beyond  this 
is  but  a  form  of  robbery. 

An  increase  of  notes  is  a  manifest  gain  to  the  issuers,  who,  until 
the  notes  are  returned  for  payment,  obtain  the  use  of  them  as  if  they 
were  a  real  capital:  and  so  long  as  the  notes  are  no  permanent  addition 
to  the  currency,  but  merely  supersede  gold  or  silver  to  the  same  amount, 
the  gain  of  tlic  issuer  is  a  loss  to  no  one;  it  is  obtained  by  saving  to 
the  community  tiie  expense  of  the  more  costly  material.     But  if  there 


316  RESTRAINTS  ON  INDUSTRY  [239 

is  no  gold  or  silver  to  be  superseded — if  the  notes  are  added  to  the 
currency,  instead  of  being  substituted  for  the  metallic  part  of  it — all 
holders  of  the  currency  lose,  by  the  depreciation  of  its  value,  the  exact 
equivalent  of  what  the  issuer  gains.  A  tax  is  virtually  levied  on  them 
for  his  benefit.*^ 

This  argument  is  founded  on  the  theorj^  that  an  increase 
of  the  volume  of  currency,  other  conditions  remaining  un- 
changed, is  attended  by  a  depreciation  of  the  currency  already 
existing  (115-125).  According  to  this  theory  the  additional 
currency  notes  ohtain  their  value  hy  rohhing  the  previously 
issued  notes  of  a  portion  of  theirs. 

Such  is  really  the  case  when  a  note  issue  is  increased  with- 
out making  provision  for  the  redemption  of  the  added  notes, 
for  in  such  case  depreciation  does  inevitably  ensue  (124).  The 
charge  of  robberj'-  against  the  issuer  is  then  justified,  not,  how- 
ever, because  of  an  increase  of  the  issue,  but  because  of  the  ab- 
sence of  provision  for  redeeming  the  notes.  Depreciation  will 
not  follow  when  the  added  currency  is  adequately  secured  by 
existing  wealth,  and  is  redeemable  in  the  commodity  constitut- 
ing the  value  unit.  Mill  and  his  fellow  disciples  of  the  earlier 
school  erred  in  assuming  that  the  value  of  currency  notes  is 
subject  to  an  economic  law  different  from  that  which  controls 
the  value  of  all  other  credit  instruments.  They  failed  to 
realize  that  the  value  of  currency  notes  is  really  derived 
from  the  wealth  which  is  pledged  for  their  redemption 
and  that  it  is  rneasured  by  their  face  value  stated  in  terms  of 
the  meUi  in  which  they  are  redeemable.  Why,  then,  expect 
^hem  to  depreciate  ?  Indeed,  the  value  of  notes  which  are  ade- 
quately secured  and  redeemable  in  gold  can  change  only  if  the 
value  of  the  metal  changes;  and  since  an  increase  of  fully 
secured  notes  redeemable  in  the  standard  metal  is  likely  to  be 
attended  by  an  increase  of  the  demand  for  the  redemption 
medium,  the  value  of  the  metal  will  rise  rather  than  fall  in 
consequence  (121,  320c).  The  fear  of  depreciation  is  ground- 
less, and  to  denounce  an  increase  of  currency  as  "inflation" 
and  "robbery"  is  wholly  unwarranted. 

"^Mill,  II,  p.  99. 


240]  MONOPOLY  THEORY  OF  INTEREST         317 

As  above  stated,  the  danger  of  depreciation  exists  only 
when  redemption  is  jeopardized.  But  Mill  and  his  school  warn 
against  any  increase  of  currency  beyond  the  volume  already 
in  existence,  however  completely  redemption  may  be  guaran- 
teed. What  reason  is  there  for  thinking  that  the  volume  now 
in  use  is  the  proper  amount  ?  Who  can  point  out  when  money 
has  attained  the  limit  of  its  usefulness?  The  very  fact  that 
periods  of  financial  stringency  do  occur  proves  that  the  value 
of  the  dollar  does  not  adapt  itself  to  the  demand  for  money 
(125),  and  to  advocate  emergency  issues  for  meeting  tem- 
poraiy  money  stringencies  is  to  admit  the  fallacy  of  the 
volume  theory.  No  law  has  ever  been  proposed  to  prevent 
an  inflation  of  looms,  or  of  locomotives,  or  of  other  tools  of 
production  and  transportation,  lest  the  value  of  the  looms 
and  the  locomotives  already  in  use  should  thereby  suffer.  In 
the  production  of  commodities  we  have  learned  to  let  free 
competition  have  its  way.  Why  should  the  most  important 
tool  of  trade,  the  medium  of  exchange,  be  treated  as  an  ex- 
ception ?  There  is  certainly  no  more  danger  in  increasing  the 
facilities  of  exchange  than  there  is  in  increasing  the  facilities 
of  production.  On  the  contrary,  every  impediment  to  ex- 
change is  at  the  same  time  an  impediment  to  production. 

240.  Interest  on  Money  Due  to  Competition  for  Money. 
— If  we  had  no  money  at  all,  a  specialization  of  the  processes 
of  production  would  be  impossible,  since  specialization  re- 
quires that  the  goods,  while  being  advanced  toward  maturity, 
be  transferred  from  group  to  group  and  subjected  to  repeated 
rearrangement.  This  fully  explains  the  existing  demand  for 
money. 

It  follows  that  if  the  total  demand  for  money  is  not  sup- 
plied, competition  will  tend  to  put  a  premium  on  its  use  (242, 
3-18).  Interest  is  accordingly  paid  on  money  because  of  its 
inadequacy  to  meet  the  demand  of  those  who  need  it  for  the 
exchange  of  their  products  or  services,  and,  as  we  shall  see 
later  (256),  this  competition  raises  the  rate  of  interest  as  high 
as  the  market  will  bear,  indeed,  so  high  as  to  exert  a  destructive 
effect  upon  the  market  (276). 


818  RESTRAINTS  ON  INDUSTRY  [240 

It  is  of  course  only  the  borrowers '  demand  for  money  while 
the  money  in  circulation  is  inadequate  to  cover  the  require- 
ments of  business  that  can  account  for  interest,  and  this 
demand  arises  generally  from  the  exigencies  of  business,  such 
as  the  employment  of  labor,  or  the  purchase  of  material  on 
credit.  Thus  money  is  usually  borrowed  to  pay  debts  so  in- 
curred or  to  be  incurred.  As  we  here  deal  with  the  question 
of  pure  interest  apart  from  the  wage  and  insurance  items  of 
gross  interest,  we  must  here  assume  that  risk  is  absent,  in  other 
words,  that  the  borrowers  have  adequate  credit  which  they 
pledge  for  the  loans. 

But  why,  it  may  be  asked,  should  it  be  held  that  the  demand 
for  money  accounts  for  the  interest  commanding  power  of 
money,  and  not  for  its  purchasing  power,  as  is  supposed  by 
economists  generally  1 

Because,  in  the  first  place,  owners  of  money  would  have  no 
inducement  to  loan  it  to  borrowers  if  the  borrowers'  demand 
for  it  would  result  only  in  maintaining  its  purchasing  power. 
In  the  absence  of  interest  the  lending  of  money  would  bring 
no  recompense  to  the  lender,  for  there  is  no  reason  to  assume 
that  money,  when  the  loan  is  returned,  would  as  a  rule  have  a 
greater  purchasing  power  than  when  the  loan  was  advanced. 

In  the  second  place,  money  is  not  in  itself  a  specific  com- 
modity, but  consists  of  credit,  the  amount  of  which  is  ex- 
pressed in  terms  of  the  adopted  standard  commodity  (115). 
Its  substance  is  therefore  the  wealth  which  constitutes  the 
security  of  the  credit,  and  its  value  is  measured  by  the  amount 
and  value  of  the  commodity  in  which  it  is  redeemable.  Only 
when  that  redemption  is  not  provided  for,  is  the  money  sub- 
ject to  depreciation  from  its  nominal  value.  An  excessive  de- 
mand for  a  medium  of  exchange  can  affect  the  purchasing 
power  of  money  only  in  the  measure  in  which  that  demand 
reacts  upon  the  value  of  the  standard  commodity,  and  this 
reaction  has  been  analyzed  heretofore  (107-108).  Demand, 
therefore,  does  not  affect  the  purchasing  power  of  money  in 
the  manner  in  which  it  affects  the  market  value  of  commodities. 

How  an  insufficient  supply  of  the  medium  of  exchange 
gives  it  the  power  to  command  interest  will  next  be  considered. 


241.  242]     MONOPOLY  THEORY  OF  INTEREST  319 

241.  Cause  of  the  Inadequacy  of  Capital. — In  dealinf? 
with  the  subject  of  money  interest  it  was  shown  (210)  that 
the  borrower  of  money  pays  interest  for  the  use  of  the  money 
and  not  for  the  use  of  the  capital  goods  bought  wdth  it,  even 
though  money  is  always  idle  capital  incapable  of  yielding  a 
revenue  to  its  holder  (133-134).  Borrowers  of  money  pay 
interest  rather  than  go  without  it  by  reason  of  the  faculty  ex- 
clusively possessed  by  money,  the  faculty  of  making  possible 
that  aggregation  of  capital  goods  which  is  indispensable  in  the 
process  of  production  (211a).  But  even  then  we  had  to  fall 
back  on  experience  for  the  fact  that  capital  employed  in  produc- 
tion returns  a  revenue  (2116),  and  an  adequate  explanation 
of  this  fact  is  yet  wanting. 

"We  have  already  observed  how  goods  in  course  of  pro- 
duction pass  from  group  to  group.  When  the  appropriate 
material  is  acquired  by  a  group,  this  material  is  live  capital 
until,  in  the  process  of  production,  it  is  advanced  toward 
maturity.  Thereupon,  as  far  as  that  group  is  concerned,  it 
becomes  a  finished  product,  or  idle  capital,  Avhicli  can  become 
live  capital,  either  as  raw  material  or  as  means  of  production, 
of  the  next  group  only  through  the  process  of  exchange.  The 
goods  thus  become  alternately  active  and  idle  capital.  It  is 
through  production  that  capital  goods  are  advanced  from  the 
active  to  the  idle  state,  and  through  exchange  that  they  are 
turned  from  an  idle  to  an  active  state.  From  this  it  is  at  once 
apparent  that  with  the  process  of  production  going  on,  and 
with  the  process  of  exchange  held  back  through  the  arbitrary 
limitation  of  the  means  of  exchange,  the  conversion  of  capital 
from  the  active  to  the  idle  state  takes  place  more  freely  than 
the  conversion  from  the  idle  to  the  active  state.  Consequently, 
the  quantity  of  idle  capital,  in  the  form  of  goods  awaiting  ex- 
change, tends  to  increase,  while  the  quantity  of  active  capital 
tends  to  diminish  (266).  In  this  lies  the  reason  for  the  ehhing 
of  capital  in  actual  employment,  and,  at  the  same  time,  for 
that  flood  of  things  in  (he  marlet  hnovm  as  " ovcrprodiiction." 

242.  Key  to  the  Theory  of  Capital  Interest. — "We  have 
heretofore  had  occasion  to  advert  to  the  relation  which  exists 
between  the  faculty  of  employed  capital  to  "earn"  a  profit, 


320  RESTRAINTS  ON  INDUSTRY  [242 

and  the  limitation  of  capital  in  actual  use  (1626),  but  could 
not  at  that  point  trace  the  cause  which  determines  the  amount 
of  employed  capital,  nor  the  reason  for  the  experienced  fact 
that  capital  is  not  put  to  use  to  the  extent  which  would  enable 
labor  to  be  employed  at  its  maximum  efficiency.  Later  we 
found  that  the  interest  commanding  power  of  capital  has  been 
almost  universally  attributed  to  a  scarcity  of  capital,  or  to 
some  psychological  factor  that  could  readily  account  for  the 
undersupply.  We  found  that  Ricardo  simply  took  this  scarcity 
as  a  matter  of  fact  (195)  and  argued  on  that  basis;  Senior 
assumed  that  men  are  naturally  averse  to  defer  the  con- 
sumption of  what  they  have  produced,  and  introduced  the  term 
"abstinence"  to  designate  self-imposed  delay  of  consumption 
(196)  ;  while  Bohm-Bawerk  presents  the  same  idea  in  the 
form  of  an  hypothetical  underestimation  of  future  pleasure 
and  pain  as  compared  with  the  present  (197).  The  disin- 
clination to  "abstain"  or  "wait,"  as  well  as  the  assumed 
underestimation  of  future  values  would  take  the  form  of  an 
unwillingness  to  produce  capital,  the  benefit  of  which  can  be 
enjoyed  only  in  the  future,  unless  that  future  benefit  is  greater 
than  can  be  obtained  through  the  same  amount  of  effort  in  the 
present ;  and  this  unwillingness  to  produce  things  which  will 
bring  benefit  only  in  the  future  would  in  turn  account  for 
that  comparative  dearth  of  capital  by  which  capital  interest 
is  explained.  But  we  have  found  (200)  that  in  the  economic 
world  the  final  utility,  and  hence  the  value  of  this  waiting,  is 
nil,  and  that  accordingly  these  psychological  factors  cannot 
be  made  to  account  for  the  faculty  of  capital  to  yield  returns. 
However,  these  theories  may  now  be  definitely  set  aside. 
Our  inquiry  has  brought  us  to  a  point  where  the  scarcity  of 
capital  can  be  explained  by  causes  of  a  positive  and  objective 
instead  of  a  negative  and  subjective  nature  (347) .  The  under- 
supply of  money  required  for  the  purpose  of  mediating  the 
transfer  of  capital  goods  from  group  to  group  fully  accounts 
for  the  scarcity  of  active  capital,  and  at  the  same  time  explains 
why  there  is  a  superabundance  of  idle  capital,  or  unsold  goods, 
generally  attributed  to  "overproduction,"  a  condition  which 
is  in  irreconcilable  conflict  with  every  one  of  the  above  cited 


242]  MONOPOLY  THEORY  OF  INTEREST  321 

theories.  That  the  power  of  active  capital  to  return  an  in- 
come is  due  to  a  scarcity  of  such  capital  is  quite  true,  but  the 
reason  for  this  shortage  has  not  been  correctly  diagnosed  by 
any  of  the  generally  accepted  authorities  on  the  subject.  We 
have  found  that  the  formation  of  active  capital  is  impeded  by 
needless  legal  restriction,  not  by  psychological  restraints,  such 
as  a  disinclination  to  produce  or  save  capital,  or  an  aversion 
to  produce  for  future  use,  that  can  be  overcome  only  by  an 
accretion  to  the  value  of  the  future  product.  These  needless 
restrictions  imposed  by  law  impede  the  free  interchange  by 
which  idle  capital  is  made  active.  This  fully  accounts  for  that 
undersupply  of  active  capital  which  imparts  to  it  an  * '  earning 
power"  approximating  its  final  efficiency  (162a),  a  power 
which  it  does  not  of  itself  possess. 

We  can  here  go  one  step  further  in  our  conclusions.  Since 
idle  capital  can  be  made  active  only  through  the  use  of  money, 
the  last  increment  of  active  capital  is  made  active  through  the 
last  increment  of  the  supplj'  of  money.  Hence  the  efficiency 
of  the  last  increment  of  active  capital,  in  other  words,  the 
final  efficiency  of  capital,  is  equal  to  the  efficiency  of  the  last 
increment  of  the  supply  of  money,  in  other  words,  to  the  final 
efficiency  of  money.  It  would  follow  from  this  that  the  rate  of 
interest  on  money  should  determine  the  rate  of  capital  returns. 

This  completely  reverses  the  usual  explanation,  according 
to  which  interest  is  paid  for  money  because  capital  goods 
bought  with  the  money  bring  returns.  The  connection  of  cause 
and  effect  is  really  as  follows.  The  deficiency  of  money  is  the 
cause  of  the  deficiency  of  active  capital,  as  just  explained. 
And  in  the  same  way  in  which  the  demand  for  money,  in 
connection  with  its  scarcity,  gives  to  money  a  command  of 
interest  (240),  so  does  the  need  of  capital  for  productive 
processes,  in  conjunction  with  its  deficiency,  impart  to  capital 
goods,  when  productively  employed,  the  faculty  of  returning 
an  income. 

Summing  up,  the  lack  of  money  has  two  direct  effects,  of 

which  the  one  is  a  lack  of  capital  goods  for  productive  processes, 

and  the  other  is  the  interest  commanding  power  of  money.    It 

has  «lso  an  indirect  effect,  growing  out  of  the  lack  of  active 

21 


322  RESTRAINTS  ON  INDUSTRY  [243 

capital,  namely  the  faculty  of  capital  goods  to  return  an 
income  when  employed  in  production. 

The  borrower  of  money,  when  he  invests  it  in  active  capital, 
is  accordingly  not  a  loser,  for  the  returns  derived  from  this 
form  of  capital  compensate  him  for  his  outlay  of  interest.  To 
him  money  is  the  instrument  hy  means  of  which  idle  and  there- 
fore unremunerative  capital  goods  are  converted  into  such  as 
a/ford  returns  (211).  It  is  to  be  observed  that  this  presenta- 
tion of  the  matter  differs  from  that  of  Calvin  in  that  it  is  not  a 
case  of  reasoning  in  a  circle,  but  traces  interest  to  a  primary 
cause  (204). 

243.  The  Missing  Link  in  the  Productivity  Theory. — We 
have  now  been  led  to  what  is  virtually  a  confirmation  of  the 
productivity  theory  of  interest.  Returns  accrue  to  invested 
capital  goods  by  reason  of  the  advantage  afforded  by  the 
last  addition  of  active  capital  to  that  in  use  before  (162). 
While  the  capital  in  use  is  limited  to  the  amount  OC,  Fig.  18, 
the  last  increment  of  this  capital  affords  an  increase,  at  the 
rate  C'e',  in  the  amount  of  products  obtainable  by  the  given 
amount  of  labor.  Competition  for  the  use  of  this  last  incre- 
ment of  capital,  therefore,  naturally  tends  to  raise  the  price  of 
this  use  to  that  rate. 

But  the  productivity  theory  of  interest  remains  incomplete 
until  the  limitation  of  active  capital  is  explained.  When  the 
capital  in  active  use  equals  OC,  and  labor's  productivity  is 
represented  by  the  area  OC'e'E,  an  addition  of  C'C  to  the 
capital  would  increase  the  output  to  the  maximum  OCE.  This 
addition  of  capital  would  therefore  yield  a  positive  advantage, 
and  we  can  discover  no  other  reason  why  it  is  not  made  than 
the  impossibility  of  converting  idle  into  active  capital  through 
the  process  of  exchange  as  rapidly  as  is  necessary  to  keep  pace 
with  the  conversion  of  active  into  idle  capital  through  the 
process  of  production  (211).  This  impossibility  has  been 
traced  to  the  insufficiency  of  the  medium  of  exchange. 

At  a  former  stage  (149)  we  were  brought  to  the  conclusion 
that  unhampered  competition  would  result  in  ultimately  con- 
ferring upon  consumers  all  of  the  advantage  derived  from  im- 
proved methods  of  production,  and  further  on  (192?))  we  also 
found  that,  in  point  of  fact,  the  consumers  do  not  reap  all  of 


243]  MONOPOLY  THEORY  OF  INTEREST  323 

this  advantage,  but  that  the  owners  of  capital  receive  a  share. 
Tliis  incongruity  has  now  been  traced  to  the  existence  of  an 
impersonal  monopoly  through  which  the  proper  assembling  of 
capital  goods  for  productive  use  is  impeded  and  competition 
correspondingly  hampered. 

There  is  a  close  similarity  in  the  play  of  economic  forces 
which  determines  prices  and  that  which  determines  interest. 
In  both  cases  two  forces  are  in  operation,  one  an  impelling, 
the  other  a  restraining  force.  In  the  production  of  com- 
modities the  impelling  force  is  the  desire  for  the  utilities  of 
the  product,  while  the  restraining  force  is  the  reluctance  to 
put  forth  effort,  which  places  a  limit  on  the  amount  produced. 
In  the  use  of  wealth  for  further  production,  that  is  to  say, 
in  the  application  of  wealth  as  capital,  the  advantage  afforded 
by  capitalistic  production  is  the  impelling  force,  while  what- 
ever holds  back  the  setting  apart  and  utilizing  of  products  of 
past  labor  for  purposes  of  further  production  constitutes  the 
restraining  force,  the  force  that  puts  a  limit  on  the  amount  of 
capital  actively  employed.  In  both  cases  the  recompense — 
value  in  the  one  and  interest  in  the  other — becomes  adjusted 
to  the  point  where  a  balance  between  the  impelling  and  the 
restraining  force  is  established. 

A  corresponding  similarity  exists  between  the  various 
theories  that  have  been  advanced  to  account  for  value  and  for 
interest.  Each  of  the  two  sets  of  theories  can  be  divided  into 
two  classes,  according  as  they  give  prominence  to  the  impelling 
or  to  the  restraining  forces.  In  the  utility  theory  of  value 
the  restraining  force,  effort  or  cost,  is  subordinated,  and  pre- 
dominance is  ascribed  to  the  impelling  force,  namely  desire  in- 
duced by  utility.  The  labor  or  cost  theory,  on  the  contrary, 
neglects  the  impelling  force  and  gives  undue  prominence  to 
the  restraining  one,  namely  effort  or  cost.  So,  likewise,  do  we 
find  in  the  productivity  theory  of  interest  an  absence  of  due 
regard  for  the  conditions  that  restrain  the  conversion  of  idle 
into  active  capital,  while  in  the  abstinence  theory  and  in  the 
"Positive  Theory  of  Capital"  the  impelling  force,  the  efficiency 
of  capitjd,  is  not  recognized  as  a  factor  coequal  in  importance 
with  the  one  that  restrains. 

It  is  singular  that  in  his  theory  of  value  Bohm-Bawerk 


324  RESTRAINTS  ON  INDUSTRY  [243 

gives  prominence  to  the  impelling  force,  the  desire  to  utilize 
things,  while  in  his  theory  of  interest  he  reverses  his  position 
by  giving  i^rominence  to  a  restraining  force,  a  dislike  for  wait- 
ing, an  unwillingness  to  accept  future  gratification  in  place  of 
an  equal  gratification  now.  In  the  one  theory  he  minimizes 
the  importance  of  the  dislike  for  putting  forth  effort,  the 
force  that  restrains  production,"  while  in  elaborating  the  other 
he  is  imbued  with  the  idea  that  the  productivity  of  capital,  the 
force  that  impels  the  utilization  of  wealth  for  purposes  of 
further  production,  cannot  account  for  interest.  On  the  one 
hand  he  considers  ' '  utility, ' '  the  impelling  principle,  to  be  the 
causation  of  value;  on  the  other  he  regards  the  "underestima- 
tion of  future  goods,"  a  principle  restraining  the  utilization 
of  present  goods  for  future  purposes,  of  wealth  as  capital,  to 
be  the  causation  of  interest. 

In  point  of  fact,  however,  that  restraining  force  which  he 
thus  adduces  as  the  dominant  factor  in  the  causation  of  in- 
terest is  really  not  such  at  all.  The  truth  is  that  it  is  not  the 
psychological  factor  adduced  by  Bohm-Bawerk,  but  the  exist- 
ing restraint  on  the  facilities  of  exchange,  that  is  the  real 
cause  of  the  insufficiency  of  active  capital  and  consequently 
the  cause  of  interest.  If  this  restraining  factor  were  removed, 
the  amount  of  capital  used  productively  would  rise  to  a  point 
where  there  is  no  advantage  to  be  gained  by  any  further  addi- 
tion to  it,  and  at  this  vanishing  point  the  impelling  and  the 
restraining  forces  would  naturally  come  to  a  balance. 

The  promulgators  and  adherents  of  the  various  forms  of 
the  abstinence  theory  of  interest  do  not  seem  to  realize  the 
close  relation  that  exists  between  it  and  the  productivity 
theory.  It  is  invariably  true  that  capital  interest,  wherever 
it  exists,  is  due  to  the  advantage  which  the  last  available  in- 
crement of  capital  affords  in  productive  use ;  in  other  words, 
to  the  final  efficiency  of  capital,  just  as  the  value  of  com- 
modities is  related  to  their  final  utility.  But  considering  that 
the  "final  efficiency"  of  capital  can  be  greater  than  nothing 
only  so  long  as  the  available  amount  of  capital  is  not  enough 
to  employ  labor  at  its  maximum  efficiency,  the  productivity 
theory,  to  be  complete,  must,  as  already  stated,  point  out  why 


2ii]  MONOPOLY  THEORY  OF  INTEREST  325 

the  available  capital  is  not  enough.  The  abstinence  theory  and 
the  "Positive  Theory"  are  simply  efforts  to  supply  the  miss- 
ing link  in  the  productivity  theory,  although  their  authors 
seem  not  to  have  been  aware  of  this;  and  that  even  these 
efforts  are  founded  on  defective  premises  has  been  shown 
above. 

"When  we  found  (192a)  that  the  productivity  theory  is 
incompetent  to  explain  the  phenomenon  of  interest,  it  was 
on  the  assumption  that  production  and  exchange  were  not  in 
any  way  impeded,  but  this,  as  we  now  find,  is  not  the  case. 
The  arguments  advanced  by  such  authorities  as  Bohm-Bawerk, 
with  the  object  of  refuting  the  various  productivity  theories, 
proceed  likewise  on  the  assumption  of  complete  industrial  and 
commercial  freedom,  and  although  the  conclusions  are  valid  on 
basis  of  this  premise,  they  do  not  disprove  that  capital  interest, 
under  existing  conditions,  is  due  to  the  advantage  afforded 
by  the  last  available  addition  to  capital,  that  is,  to  the  final 
efficiency  of  capital,  for  the  simple  reason  that  those  arguments 
assume  conditions  which  do  not  at  present  exist. 

The  lack  of  capital  is  not  due  to  natural  causes,  hence  the 
power  of  capital  to  command  a  share  in  the  distribution  of  the 
r&sults  of  effort  is  not  a  natural  attribute,  but  is  acquired 
through  the  effect  of  restrictions  now  in  force.  While  capital  is 
indeed  a  necessary  link  in  the  processes  of  production,  it  is 
not  an  active  factor,  any  more  than  a  belt  that  transmits  power 
from  pulley  to  pulley  is  productive  of  power.  Just  as  the 
belt  is  a  mere  transmitter  of  energy,  so  is  capital  but  a  passive 
factor  in  the  productive  processes,  a  mere  vehicle  of  effort.  It 
does  not  "earn"  the  profits  which  it  gets. 

244.  The  Law  of  Interest. — Before  proceeding  to  deduce 
from  tlu'  theoiy  of  interest  the  economic  law  by  which  the  rate 
of  interest  is  determined,  we  may  well  pause  brierly  to  le- 
view  the  conclusions  thus  far  reached.  The  factors  of  the 
problem  become  more  uiunerous  as  we  proceed ;  their  relations 
become  more  complicated.  To  avoid  the  danger  of  getting  on 
the  wrong  track,  we  must  carefully  keep  in  close  touch  with 
our  present  line  of  inquiry,  namely  that  regarding  the  ad- 


326  RESTRAINTS  ON  INDUSTRY  [244 

vantages  afforded  by  the  application  of  capital  and  money  in 
the  processes  of  production. 

The  effective  utilization  of  the  discoveries  and  inventions 
of  the  past,  through  which  the  productivity  of  labor  is  in- 
creased, is  generally  coincident  with  the  employment  of  an 
increased  amount  of  capital,  but  since  the  amount  of  capital 
available  for  productive  use  is  inadequate  to  employ  labor  at 
its  maximum  efficiency,  capital  acquires  the  power  to  exact  a 
portion  of  the  value  produced,  at  a  rate  depending  on  its  final 
efficiency. 

This  final  efficiency  can  become  a  positive  quantity  only 
when  the  amount  of  capital  in  productive  use  is  insufficient  to 
employ  labor  at  its  maximum  efficiency.  Reverting  to  the 
diagram  Fig.  18,  if  the  capital  in  productive  use  is  limited  to 
OC,  the  final  efficiency  is  equal  to  Oi  and  the  rate  of  interest 
tends  to  this  ordinate  (162).  The  total  value  produced,  which 
is  represented  by  the  area  OC'e'E,  is  then  divided  into  two 
parts  by  the  horizontal  line  ie',  the  quantity  above  this  line 
accruing  to  labor,  that  below  to  capital. 

If  an  employer  borrows  money,  it  is  either  to  buy  addi- 
tional capital  goods  and  employ  additional  labor,  thus  increas- 
ing his  output,  or  to  pay  debts  incurred  by  having  previously 
done  so.  For  the  purpose  of  our  present  analysis  we  may 
apply  the  diagram  Fig.  18  to  that  part  of  his  business  only 
which  has  been  added  through  the  borrowed  money.  The  area 
OC'e'E  then  represents  the  amount  produced  by  the  additional 
labor  in  conjunction  with  the  additional  capital  represented 
by  0C\  The  rate  of  interest  payable  on  the  borrowed  money 
being  Oi,  the  above  output  is  divided  by  the  line  ie'  into  two 
parts,  of  which  the  one,  OC'e'i,  must  be  devoted  to  the  pay- 
ment of  interest  on  the  loan,  while  the  other,  ie'E,  represents 
the  part  which  accrues  to  the  additional  employes  for  their 
labor  and  to  the  employer  for  the  additional  service  rendered 
by  him.  The  efforts  of  the  employer  becoming  more  efficient 
by  such  investment  of  the  borrowed  money,  his  wage  income 
is  increased,  and  this  is  the  only  substantial  inducement  to 
borrow. 

It  is  now  to  be  observed  that  the  area  OC'e'E  represents 


243]  MONOPOLY  THEORY  OF  INTEREST  327 

products  which,  having  to  be  marketed,  are  idle  capital  until 
sold.  If  the  borrower  now  could  hand  over  to  the  lender  that 
portion  of  his  products  which,  as  stated  above,  must  be  devoted 
to  the  payment  of  interest,  the  transaction  would  find  its  con- 
clusion in  the  division  of  the  products  between  labor  and 
capital  in  the  proportion  in  which  the  line  ie'  divided  the 
total  area  OC'e'E  into  two  parts. 

But  the  lenders  of  money  do  not  agree  to  any  such  proposi- 
tion. While  their  money  enables  the  borrowers  to  increase  the 
quantity  of  their  output  of  products,  they  require  the  interest 
to  be  paid  in  money,  not  in  hmd.  While  the  advantage  of  the 
hat  manufacturer,  as  borrower,  accrues  to  him  in  the  form  of 
more  hats,  or  that  of  the  shoe  manufacturer  in  the  form  of 
more  shoes,  the  lender  will  not  accept  his  share  of  the  profits  in 
the  form  of  hats  or  of  shoes.  Before  the  borrower  can  apply 
his  increased  products  to  the  payment  of  interest,  he  must  sell 
Jiis  goods  and  get  money  for  them  (345) . 

At  first  glance  it  would  appear  that  this  has  no  bearing  on 
the  problem  itself,  but  upon  closer  examination  it  will  be  found 
that  the  process  of  selling  his  goods  introduces  complications 
which  must  be  taken  into  account,  and  this  can  be  done  only 
by  an  exhaustive  study  of  the  circulation  of  money. 

245.  The  Barren  Circulation  of  Money."* — When  money 
performs  its  normal  function  of  mediating  exchanges,  its  flow 
from  the  buyer  to  the  seller  is  attended  by  an  opposite  and 
equivalent  flow  of  goods  from  the  seller  to  the  buyer.  This 
flow  of  goods  embraces  the  process  by  which  idle  capital  is 
made  active  (211).  But  in  the  world  of  affairs  there  are  also 
found  currents  of  money  which  flow  independently  of  any 
flow  of  goods.  Money  passes  not  only  from  consumer  to  mer- 
chant, and  from  merchant  to  producer  (120),  but  also  be- 
tween lender  and  ])orrowcr.     The  flow  or  "circulation"  of 

"*The  analysis  here  following  is  in  part  a  re-statement  of  an 
article  by  11.  Biigram,  entitled  "  The  Cause  of  Business  Stagnation," 
published  in  the  Annals  of  the  American  Academy  of  Political  and 
Social  Science,  January,  1005.  An  outline  of  the  same  subject  had 
previously  been  ptiblishcd  in  the  Appendix  to  "  Involuntary  Idleness," 
by  the  same  author. 


S28  RESTRAINTS  ON  INDUSTRY  [246 

money  through  which  exchanges  of  goods  and  services  are 
effected  may  be  termed  the  efficient  or  fruitful  flow,  in  con- 
tradistinction to  that  flow  in  which  it  does  not  mediate  the  ex- 
change of  goods  or  services.  While  money,  in  the  process  of 
lending,  passes  from  hand  to  hand,  it  does  not  perform  its 
normal  function,  it  is  not  given  in  exchange  for  goods.  Nor  is 
an  exchange  of  goods  involved  when  money  is  used  in  the 
payment  of  a  loan.  Such  flow  of  money  as  is  not  effective  in 
the  exchange  of  goods  may  appropriately  be  termed  inefficient 
or  harren  flow.  While  modern  economists  have  given  attention 
to  the  efficient  circulation,  showing  that  normally  the  monetary 
flow  equals  the  industrial  flow  of  goods  and  services  (119),  the 
study  of  the  barren  flow  has  been  entirely  neglected,  although, 
as  we  shall  learn,  it  is  only  through  this  study  that  the  law  of 
interest  can  be  learned.  Our  next  inquiry  will  therefore  be 
centred  on  that  flow  of  money  which  results  from  the  process 
of  issuing  and  retiring  money,  as  well  as  from  the  lending  of 
money  and  its  return. 

For  the  same  reason  as  that  which  requires  us  to  distinguish 
between  the  efficient  and  the  barren  flow  of  money,  we  must 
also  distinguish  between  debts  arising  from  the  delivenj  of 
goods  or  the  rendering  of  services  and  those  arising  from 
money  loans.  The  former  result  from  a  temporaiy  excess  of 
the  industrial  flow  over  the  effective  monetary  flow  (270), 
while  the  latter  are  incidental  to  those  monetary  movements 
which  take  place  apart  from  distinctively  industrial  trans- 
actions. As  it  is  of  vital  importance  to  make  this  distinction, 
we  shall  select  the  terms  "business  debts"  and  "loan  debts'' 
to  differentiate  the  same. 

246.  The  Growth  of  Loan  Debts. — When  a  debtor  pays  a 
loan,  the  amount  returned  exceeds  the  amount  borrowed  by 
the  interest  paid  for  the  loan.  The  return  flow  of  money  to 
the  lenders  is  therefore  greater  than  the  outflow  from  the 
lenders. 

Since  lenders  who  make  a  business  of  lending  usually  apply 
not  only  the  principal,  but  also  more  or  less  of  the  interest 
received  by  them  for  further  loans,  it  follows  that  the  indebted- 
ness of  the  borrowers  to  the  lenders  must  constantly  increase. 


247]  MONOPOLY  THEORY  OF  INTEREST  329 

Furthermore,  since  ^vith  every  increase  of  the  siun  total  of 
loan  debts  the  amount  of  interest  thereon  increases  corre- 
spondingly, this  increase  of  loan  debts  takes  place  in  what 
is  virtually  a  geometric  progression,  at  least  so  long  as  the 
debtors  continue  to  keep  the  money  in  active  circulation  by 
borrowing.  It  is  however  plain  enough  that  a  geometric 
progression  will  in  time  rise  to  practically  impossible  amounts, 
A  stage  will  therefore  be  reached,  sooner  or  later,  when  this 
process  cannot  go  on  any  further.  The  debtor  class  will  then 
be  unable  to  meet  its  obligations,  and  a  financial  "  crash  " 
ensues. 

This  is  but  a  bare  statement  of  what  really  goes  on.  The 
money-lenders  spend  part  of  their  income  for  purposes  other 
than  lending,  thus  returning  some  money  to  active  circulation 
without  adding  to  the  sum-total  of  loan  debts.  On  the  other 
hand,  some  workmen  place  part  of  their  wages  in  saving  banks, 
and  some  business  men  apply  part  of  their  earnings  to  loans, 
thereby  bringing  about  an  increase  of  the  amount  of  loan 
debts.  We  have  accordingly  to  subject  these  conditions  to  a 
closer  scrutiny. 

247.  Differentiating  the  Financial  from  the  Industrial 
World. — We  have  spoken  of  the  circulation  of  money  as  being 
divided  into  a  fruitful  and  a  barren  flow,  and  have  indicated 
in  general  the  processes  of  the  latter.  For  a  more  detailed 
study  of  this  phase  of  our  problem  let  us  consider  the  lenders 
of  money  and  the  users  of  money  as  being  embraced  in  two 
separate  categories.  These  we  will  denominate  the  "  finan- 
cial "  and  the  "  industrial  "  division,  it  being  understood,  of 
course,  that  the  term  **  industrial  "  includes  commercial  func- 
tions as  well.  These  two  categories  accordingly  embrace  the 
entire  range  of  the  economic  world.  The  first  class  comprises 
the  lenders  of  money  and  the  agents  of  money  issues ;  the  second 
the  buyers  and  sellers  of  both  capital  goods  and  consumption 
goods  in  all  the  various  channels  of  production  and  exchange. 
Having  recognized  this  distinction,  let  us  carefully  observe 
Ihe  flow  of  money  passing  between  the  two  classes,  and  espe- 
cially the  effect  of  this  process  vpon  the  volume  of  money  in 
the  active  field  and  upon  the  volume  of  loan  debts. 


330  RESTRAINTS  ON  INDUSTRY  [247 

It  may  well  be  asked  whether  we  can  reasonably  assume 
such  a  division  of  the  economic  world.  The  fact  that  any  one 
individual  may  use  some  of  his  money  as  a  medium  of  exchange 
for  the  purchase  of  things  or  services  and  some  as  capital  for 
loans,  and  thus  at  once  functionate  in  both  the  industrial  and 
the  financial  sense,  may  be  considered  as  making  such  a  divi- 
sion logically  unassumable.  But  we  are  here  dealing  with 
economic  functions  rather  than  with  the  men  who  perform 
them.  We  have  already  pointed  out  (16)  that  an  individual 
may  perform  various  separate  economic  functions  and  may 
thus  have  a  correspondingly  multiple  existence  in  the  economic 
sense.  Every  man  who  uses  money  both  for  buying  things  and 
for  lending  is  identified  with  both  the  industrial  and  the 
financial  class  in  the  measure  in  which  he  is  a  buyer  or  a 
lender  respectively.  He  simply  performs  the  part  of  two 
distinct  economic  persons. 

Inasmuch  as  the  difference  of  functions  relates  to  the  two 
different  uses  of  money,  the  sum  total  of  money  falls  into  two 
distinct  divisions.  When  money  is  on  hand  for  buying  things 
or  services,  it  is  in  position  to  perform  its  normal  function  as 
a  medium  of  exchange ;  it  is  in  an  active  state,  as  it  were.  But 
when  money  is  on  hand  for  lending,  it  is  not  in  position  to 
perform  its  normal  function  as  a  medium  of  exchange  and  is 
accordingly  in  a  passive  state. 

A  graphical  representation  may  again  facilitate  our  study. 
Let  us  assume  all  money  to  be  contained  within  an  inclosure. 
Fig.  25,  which  is  divided,  by  a  partition,  into  two  compartments 
or  fields,  the  one  containing  the  active,  the  other  the  passive 
funds.  The  field  of  the  passive  funds  pertains  to  the  lenders  of 
money  and  the  agents  of  money  issues,  in  short,  to  the  financial 
class.  The  field  of  the  active  funds  includes  the  users  of 
money,  the  producers  and  consumers,  in  short,  the  industrial 
class.  All  money  transactions  making  up  the  efficient  circula- 
tion, comprising  all  kinds  of  sales  and  purchases,  take  place 
within  this  field.  By  thus  eliminating  that  circulation  of 
money  which  mediates  the  industrial  flow,  we  can  confine  our 
study  to  the  barren  circulation,  namely  that  flow  of  money 
which  does  not  mediate  exchanges  and  which  passes  between  the 


248]  MONOPOLY  THEORY  OF  INTEREST  331 

financial  and  the  industrial  classes.  The  partition  which  in 
the  diagram  separates  the  active  from  the  passive  field  is  repre- 
sented as  having  openings  or  channels  through  which  the 
currents  of  this  circulation  flow. 

248.  The  Several  Barren  Currents. — At  first  we  can  dis- 
cern three  barren  currents  passing  between  the  two  fields. 
One  of  these,  flowing  from  the  passive  to  the  active  division, 
is  that  which  results  from  the  borrowing  and  lending  of 
money.®''  This  current  has  the  double  effect  of  increasing  both 
the  volume  of  active  funds  and  the  total  sum  of  loan  debts. 
The  other  two  currents  flow  in  the  opposite  direction.  The 
one  is  the  pajTnent  of  loans  and  the  other  the  payment  of 
interest.  Both  bring  about  a  diminution  of  active  funds,  but 
the  first  of  the  two  has  the  additional  effect  of  reducing  the 
loan  debts. 

It  has  been  pointed  out  before  (139)  that  gross  interest 
really  consists  of  three  items :  first,  compensation  for  labor  and 
other  costs  connected  with  the  business  of  lending;  second, 
insurance  on  the  risk  assumed  by  lending;  and  third,  pure 
interest,  the  net  profit  on  money  loans.  The  first  of  these 
three  items  is  a  payment  for  personal  services  and  is  therefore 
a  transaction  that  is  to  be  classed  as  part  of  the  fruitful  circu- 
lation of  money,  taking  place  within  the  division  of  active 
funds.  Only  the  second  and  third  items  are  really  to  be  in- 
cluded in  the  stream  of  payments  passing  as  interest  on  loan 
debts  from  one  division  to  the  other."^  For  this  reason  only 
two  items,  insurance  on  risk  and  interest  proper,  can,  in  our 
present  consideration,  be  included  in  the  term  **  gross  in- 
terest."    The   interest  with  which  we   are   here  dealing   is 

*  Wlien  notes  are  discounted,  we  can,  of  course,  consider  only  tlie 
discounted  amount  as  constituting  the  actual  loan. 

•*  When  the  business  of  lending  is  transacted  through  an  agent, 
tills  agent  usually  deducts  his  commission  and  other  expenses,  the  cost 
of  his  services,  and  pays  to  his  client  the  gross  interest  minus  that  cost. 
If  the  lender  himself  attends  to  that  business,  the  item  cost  accrues  to 
him  as  wages  and  expenses,  and  these  he  receives  as  member  of  the 
industrial  class.  Only  the  remainder  goes  to  him  as  member  of  the 
financial  class. 


332  RESTRAINTS  ON  INDUSTRY  [249 

therefore  only  that  portion  of  the  gross  interest  which  is  not 
in  any  way  a  recompense  for  personal  service. 

The  currents  thvis  far  discussed  may  be  designated  by  the 
letters  L  (Loans),  P  (Payment  of  Loans)  and  G  (Gross  Inter- 
est, consisting  of  R  plus  /,  Risk  Insurance  plus  Pure  Interest). 

In  the  long  run  the  current  P,  namely  payments  on  loan 
debts,  will  not  fully  balance  the  current  L,  because  some 
debtors  default  in  their  payments.  But  the  resulting  losses 
are  made  good  by  that  portion  E  of  the  gross  interest  G  which  is 
devoted  to  risk  insurance  (251).  For  this  reason  the  sum 
P  -\-  R  will  in  the  end  equal  the  loan  current  L.  The  effect 
of  this  system  of  insurance  is  the  same  as  though  the  current 
R  were  applied  to  pay  off  that  portion  of  the  debts  which  the 
delinquent  debtors  fail  to  pay.  The  branch  R  of  the  current 
G  must  therefore  be  regarded  as  having  the  effect  of  reducing 
the  volume  of  loan  debts,  while,  on  the  other  hand,  the  branch 
/  has  no  such  effect. 

249.  Preparatory  Currents. — In  tracing  the  circulation  of 
money,  as  it  passes  to  and  fro  between  the  passive  and  the 
active  fields,  it  will  be  found  necessary  to  recognize  two  addi- 
tional currents. 

The  field  of  passive  funds  contains  all  of  that  monej-,  in- 
cluding, of  course,  all  of  that  bank  credit,  which,  after  having 
been  put  into  circulation,  has  found  its  way  back  into  the 
passive  field  through  either  the  channel  P  or  G.  If  there  were 
only  the  three  channels  L,  P,  and  G  available,  this  money  could 
not  go  into  circulation  except  through  lending,  in  other  words, 
by  passing  through  the  channel  L.  But  some  of  this  money 
is  constantly  being  put  to  use  for  purposes  other  than  lending, 
for  instance,  for  personal  requirements,  or  for  investment  in 
industrial  or  commercial  pursuits  (275).  Inasmuch  as  it  is 
only  when  money  is  in  the  active  field  that  it  can  be  put  to 
active  use,  we  must  needs  assume  that  any  money  of  the 
passive  field  which  is  to  be  put  to  active  use  must  first  be 
transferred  into  that  field.  "We  have  accordingly  to  provide 
in  our  diagram  a  channel  through  which  this  transfer  takes 
place,  and  this  channel  is  indicated  in  Fig.  25  at  E  (Expendi- 
tures).   Such  use  of  part  of  the  passive  funds  must  therefore 


249]  MONOPOLY  THEORY  OF  INTEREST  333 

be  considered  as  a  double  transaction;  first,  as  a  barren  floAv 
of  money  through  the  channel  E  from  the  passive  to  the  active 
field,  and  second,  as  a  fruitful  circulation  of  money  within 
the  active  field,  where  it  performs  its  normal  function  of 
mediating  the  exchange  of  goods  and  services. 

Conversely,  money  which  is  circulating  in  the  active  field 
may  be  Avithdrawn  from  further  active  circulation  and  appMed 
to  lending.  It  is  thereby  directed  into  the  current  L,  but  be- 
fore it  can  join  that  current,  it  must  be  regarded  as  having  been 
transferred  from  the  field  of  active  to  that  of  passive  funds. 
Hence,  in  the  process  of  lending  out  money  from  the  active 
field,  it  undergoes  a  double  transfer;  first,  a  preparatory 
transfer  through  the  channel  designated  *S'  (Savings),  and 
second,  the  subsequent  flow  through  the  channel  L. 

In  one  respect  the  terms  "  expenditures  "  and  "  savings," 
selected  to  denominate  the  currents  E  and  S,  are  not  properly 
descriptive.  These  currents  should  be  conceived  as  being  dis- 
tinct from  the  succeeding  transactions  to  w^hich  they  are 
merely  preparatory.  The  current  E  does  not  represent  the 
act  of  giving  money  in  exchange  for  things,  the  act  of  spend- 
ing it,  for  that  pertains  to  the  efficient  circulation.  It  is  made 
up  only  of  those  transfers  of  money  from  the  passive  to  the 
active  field  which  must  be  presupposed  when  money  which  is 
in  the  passive  field  is  to  be  used  in  the  active  field.  Similarly, 
the  current  S  is  made  up  of  those  transfers  that  must  bo 
assumed  as  preceding  the  act  of  lending  whenever  money  which 
is  in  the  active  field  is  being  diverted  from  active  use  and  mjido 
the  subject  of  lending. 

These  preparatoiy  transfers  consist  of  nothing  but  a  change 
in  th6  status  of  money  while  in  the  owner's  hands.  There  is 
no  bodily  transfer,  but  only  a  shifting  in  the  direction  of  its 
use.  We  may  view  this  shifting  as  though  the  owner,  in  his 
capacity  of  member  of  the  financial  class,  hands  over  this 
money  to  his  other  economic  self,  member  of  the  industrial 
class,  or  vice  versa.  The  money  is  merely  transferred,  by  the 
will  of  the  owner,  from  one  field  to  the  other.  While  we  must 
regard  these  transfers  as  currents,  they  are  currents  only  in  a 
figurative  sense. 


334  RESTRAINTS  ON  INDUSTRY  [250 

In  another  respect,  however,  the  above  nomenclature  is 
justified.  The  current  E,  although  representing  only  a  pre- 
paratory change  in  the  direction  of  the  money  before  it  is 
expended,  actually  measures  the  amount  of  money  expended 
by  the  members  of  the  financial  group  in  the  industrial  market, 
while  the  current  8  measures  the  amount  of  money  withdrawn 
from  the  active  field  through  its  being  put  out  at  interest ;  or, 
if  viewed  in  connection  with  the  attendant  augmentation  of 
the  current  L,  whereby  it  is  returned  to  the  active  field,  the 
current  S  measures  an  increase  of  the  volume  of  money  debts 
unattended  by  any  increase  of  active  funds. 

The  five  currents  above  described,  one  of  which  is  a  com- 
posite current,  together  constitute  the  barren  circulation,  and 
each  of  them  has  a  specific  bearing  on  our  problem  regarding 
the  volume  of  active  funds  and  the  sum  of  loan  debts.  Their 
effect  may  be  tabulated  as  follows : 

Current  L  Increases  Active  Funds  and  Increases  Loan  Debts. 
P  Decreases  Active  Funds  and  Decreases  Loan  Debts. 
(  R  Decreases  Active  Funds  and  Decreases  Loan  Debts. 
^  /  Decreases  Active  Funds  and  has  no  Effect  on  Loan  Debts. 
E  Increases  Active  Funds  and  has  no  Effect  on  Loan  Debts. 
8  Decreases  Active  Funds  and  has  no  Effect  on  Loan  Debts. 

250.  The  Volume  of  Active  Funds. — A  glance  at  the 
diagram  Fig,  25  shows  that  all  changes  in  the  volume  of 
money  in  active  circulation  are  determined  wholly  by  the 
volume  of  the  several  currents  just  described.  Whenever  the 
currents  flowing  toward  the  field  of  active  funds  predominate, 
the  volume  of  active  funds  is  increased,  and  when  the  reverse 
condition  prevails,  this  volume  is  reduced.  Pas.sive  funds  can 
go  into  circulation  only  by  passing  through  either  of  the  chan- 
nels L  or  E.  On  the  other  hand,  money  can  be  removed  from 
active  circulation  only  by  passing  through  either  of  the 
channels  P,  G  or  ;S." 

If  we  denote  by  the  letter  Y  the  volume  of  funds  circulat- 
ing in  the  active  field,  and  by  dV  the  change  or  differential  of 

''  Money  which  is  hoarded  is  virtually  not  in  active  use,  but  for  our 
present  inquiry  it  may  be  considered  as  remaining  in  the  division  of 
active  funds,  as  long  is  it  is  merely  hoarded. 


251]  MONOPOLY  THEORY  OF  INTEREST  335 

this  volume  within  a  given  period,  the  extent  of  this  change 
can  be  found  from  the  volume  of  the  various  currents  during 
the  same  period.  This  relation  can  be  expressed  in  the  form 
of  the  equation. 

(1)  dy  =  L  —  P  —  R  —  I-\-E  —  S. 

This  equation  will  be  used  below  for  further  deductions. 

251.  The  Volume  of  Loan  Debts. — As  we  have  seen,  these 
currents  affect  not  only  the  volume  of  money  circulating  in  the 
active  field,  but  also  the  volume  of  loan  debts,  that  is,  the  total 
indebtedness  of  the  industrial  to  the  financial  world. 

The  volume  of  loan  debts  is  increased  by  the  current  L  and 
is  reduced  by  the  opposite  current  P.  There  is,  however, 
another  factor,  already  adverted  to  (248),  which  reduces  the 
volume  of  debts,  namely  the  occasional  insolvency  of  debtors. 
A  vast  amount  of  loan  debts  is  annually  written  off  to  loss  on 
this  account.  But,  in  the  aggregate,  this  loss  is  made  good  by 
that  portion  of  the  gross  interest  G,  which  constitutes  the  in- 
surance against  risk  and  which  we  have  designated  E,  the 
portion  through  which  the  solvent  borrowers  are  virtually 
made  to  pay  the  debts  of  the  insolvent  ones  (289).  It  follows, 
then,  that  L,  P  and  R  are  the  three  items  governing  the  volume 
of  loan  debts. 

As  stated  before,  the  loan  debts  here  under  consideration 
include  only  the  debts  directly  incurred  by  the  borrowing  of 
money,  but  not  industrial  or  business  debts  arising  from  the 
delivery  of  goods  or  services,  since  the  latter  transactions  are 
clearly  such  as  take  place  within  the  active  field. 

If  now  the  letter  D  is  used  to  designate  the  volume  of  loan 
debts,  and  dD  the  change  or  differential  of  this  volume  during 
a  given  period,  it  is  evident  that : 

(2)  dD  =  L  —  P  —  R. 

Substituting  in  ofpiation  (1)  for  L  —  P  —  R  its  equal  dD^ 
as  per  equation  (2)  and  solving  for  /,  we  obtain  : 

(3)  l  =  E  —  S-\-dD  —  dV. 

'I'his  formula  presents  the  conditions  which  determine  the 

total  amount  of  net  interest  received  ])V  the  lenders  as  a  class 


336  RESTRAINTS  ON  INDUSTRY  [251 

during  any  given  period.  It  applies  to  short  as  well  as  to  long 
periods,  but  when  long  periods  are  in  consideration,  the  differ- 
ential terms  are  insignificant  as  compared  with  the  other  terms 
and,  accordingly,  become  negligible.  The  equation  will  then 
assume  the  form : 
(4)  I  =  E  —  S. 

The  two  quantities  E  and  S  are  what  we  have  termed  ' '  pre- 
paratory ' '  currents.  Of  these  the  current  8  flows  opposite  to 
the  current  E,  and  since  the  latter  measures  the  expenditure 
of  money  by  the  lender  class  in  the  industrial  market,  while 
the  current  8  measures  the  withdrawal  of  money  from  the 
industrial  market  for  the  purpose  of  lending,  we  can  regard  the 
difference  E  —  8  as  measuring  the  ''net-expenditures"  by 
the  lenders  (272). 

Equation  (4)  is  to  be  interpreted  to  the  effect  that  in  the 
long  run  the  total  interest  /  received  by  the  lending  class  equals 
the  net-expenditures   of  that  class  in  the  industrial  market. 

Applied  to  a  static  business  condition  (252)  in  which  both 
the  volume  of  money  in  circulation  and  the  total  volume  of 
loan  debts  remain  unchanged,  this  equation  is,  indeed,  strictly 
true  for  both  short  and  long  periods.  The  sum  total  of  loan 
debts  can  remain  stationary  only  while  the  currents  L,  P  and 
R  of  Fig.  25  balance  each  other,  and  if  the  volume  of  money  in 
the  active  division  is  also  to  remain  unchanged,  the  three  re- 
maining currents  I,  E  and  8  must  likewise  balance,  and  this 
is  expressed  by  formula  (4). 

The  business  world  is,  however,  not  insuch  static  condition. 
Changes  constantly  occur  which  affect  both  the  volume  of  loan 
debts  and  the  volume  of  money  in  actual  use.  But  neither  the 
one  nor  the  other  can  be  increased  or  reduced  indefinitely,  and 
for  this  reason  the  equation  (4),  although  but  an  approxima- 
tion, is  practically  true  in  the  long  run.  This  means  that  the 
total  net-interest  I,  accruing  to  the  lenders  of  money,  cannot 
indefinitely  exceed  the  difference  between  E  and  8,  nor  can  it 
be  indefinitely  less  (274).  There  are  periods  in  which  the 
volume  /  exceeds  the  difference  E  —  ;S',  but  such  periods  must 
necessarily  be  succeeded  by  other  periods  in  which  the  condi- 


252]  MONOPOLY  THEORY  OF  INTEREST  337 

tions  are  reversed,  E  —  S  then  exceeding  the  volume  of  /. 
For  the  study  of  these  periodic  changes,  which  we  shall  take 
up  in  the  next  chapter  (271),  we  must  have  recourse  to  the 
unabbreviated  equation  (3),  which  is  correct  under  all  condi- 
tions. In  the  present  chapter  we  shall  confine  our  investigation 
principally  to  the  proposition  that  the  volume  of  I  cannot  con- 
tinuously exceed  the  difference  E  —  8  on  the  ground  that 
equation  (4)  is  substantially  true,  although  temporary  de- 
partures on  either  side  may  occur.^^ 

252.  The  Rate  of  Interest. — If  I,  the  total  net  income 
accruing  as  interest,  and  D,  the  sum  total  of  loan  debts,  are 
given,  the  determination  of  the  rate  of  interest  is  a  question  of 
simple  arithmetic.  Suppose  we  could  obtain  the  respective 
data  covering  the  period  of  one  year,  the  rate  i  of  interest 
would  be  found  as  follows : 

i  —  lOOXl-^  D. 

Since  the  value  of  D  is  unavoidably  variable  during  the 
period,  the  value  of  i  should  really  be  obtained  by  a  process  of 
integration,  but  for  our  purpose  it  will  suffice  to  assume  that 
the  corresponding  average  of  D  is  given. 

By  inserting  the  value  of  /  from  formula  (3),  we  obtain 
(267)  : 
(5)  i  =  ioox{E  —  S-{-dD  —  cW)-^D, 

or,  by  applying  the  abbreviated  equation  (4),  we  obtain  the 

"'  It  is  a  fact  that  in  long  periods  the  total  volume  V  of  our  money, 
including  bank  credit,  slowly  increases,  principally  because  of  the  slow 
increase  of  our  stock  of  gold  and  the  coincident  expansion  of  the 
system  of  bank  credit.  But  the  same  is  also  true  for  the  total  volume 
D  of  the  indebtedness  of  the  industrial  to  the  financial  world.  In  as- 
suming that  the  difference  dD  —  dV  can  be  neglected,  we  not  only  ignore 
the  periodic  fluctuations  of  the  quantities  D  and  T",  but  we  also  take  for 
granted,  in  considering  long  periods,  either  that  both  do  not  change  at 
all,  or,  if  they  do  change,  that  the  change  is  equal  for  both.  This  la 
indeed  nearly  the  case,  for  every  increase  of  bank  credit  is  attended 
by  a  nearly  equal  increase  of  business  debts.  But  while  there  is  some 
diflTerence,  formula  (4),  though  true  in  the  main,  is  not  mathematically 
correct.  On  the  other  hand,  all  deductions  based  on  formula(3)  are 
accurate  throughout. 

22 


338  RESTRAINTS  ON  INDUSTRY  [253 

rate  of  interest  prevailing  under  static  conditions  (251)  as 

follows : 

(6)  i  =  100X  {E  —  S)^D. 

This  last  formvila  also  represents  the  general  average  rate 
of  interest  in  the  actual  business  world. 

The  volume  of  the  currents  E  and  S,  which  we  termed 
preparatory  currents,  depends  solely  on  the  option  of  those 
who  have  the  money  to  spend.  They  are  free  to  make  such 
use  of  it  as  seems  fitting  to  them.  Their  motives  for  using  it  in 
one  way  or  another  are  not  within  the  scope  of  our  present 
inquiry.  E  and  S  are  accordingly  quantities  which  are  inde- 
pendent of  other  economic  factors  and,  like  the  quantity  D, 
must  be  accepted  as  economically  fundamental  data.  Hence 
the  formulas  (5)  and  (6)  express  the  law  of  interest,  at  least 
as  regards  money  loans. 

253.  A  Seeming  Contradiction. — This  law  appears  to  be 
inconsistent  with  our  earlier  conclusions,  according  to  which 
the  rate  of  interest  depends  on  the  final  efficiency  of  money 
(242-244).  There  can  be  no  possible  relationship  between  the 
productivity  of  the  last  increment  of  capital  made  available 
by  the  last  increment  of  the  volume  of  money  on  the  one  hand 
and  the  quantities  E,  S,  and  D  on  the  other.  But  the  reason 
of  this  manifest  discrepancy  is  not  far  to  seek.  Let  us  for  the 
moment  take  recourse  to  an  analogy  in  dynamics. 

Isaac  Newton  showed  that  the  velocity  of  a  falling  body 
constantly  increases  and,  at  any  moment,  is  proportional  to  the 
time  of  the  fall,  or  to  the  square  root  of  the  height  through 
which  the  body  has  fallen.  This  law  is,  however,  not  verified 
in  the  descent  of  a  drop  of  water  falling  through  the  air  from 
a  great  elevation.  At  the  start  it  has  indeed  an  accelerated 
motion  in  accordance  with  Newton's  law,  but  presently  the 
acceleration  becomes  less,  and  finally  the  drop  continues  its 
downward  course  with  a  nearly  uniform  instead  of  an  acceler- 
ated motion. 

This  fact  is  strikingly  illustrated  in  nature  by  a  number  of 
high  waterfalls,  among  them  that  of  the  Staubbaeh  near 
Lauterbninnen,  Switzerland.    This  stream  descends  the  upper 


254]  MONOPOLY  THEORY  OF  INTEREST  339 

slope  of  the  mountain  in  large  irregular  billows  which,  upon 
breaking  over  the  brink  of  the  fall,  partake  at  first  of  an 
accelerated  motion.  But  after  descending  through  a  small 
part  of  their  plunge  they  break  into  spray  and  continue  to  fall 
in  curtain-like  festoons  at  a  speed  which  is  quite  uniform,  as 
far  as  the  eye  can  judge. 

"Why  is  it  that  these  descending  drops  fail  to  follow  the 
universal  law  of  falling  bodies  ?  For  the  simple  reason  that  an 
interfering  factor,  the  resistance  of  the  air,  modifies  the  motion 
and  finally  develops  a  reacting  force  equal  to  the  weight  of  the 
drop,  when  acceleration  ceases  and  the  motion  becomes  uni- 
form. The  velocity  of  the  falling  drop  is  ruled  by  a  law 
radically  difi'erent  from  the  law  of  falling  bodies  which  Newton 
traced  to  the  primary  cause,  gravity.  The  final  velocity  of  the 
drop  depends  neither  on  the  time  nor  on  the  height  of  its 
descent,  but  on  its  weight  and  size,  on  the  density  of  the  air 
and  on  the  law  of  the  resistance  of  bodies  moving  in  fluids. 
Yet,  this  fact  in  no  sense  contravenes  Newton's  law  of  falling 
bodies.  In  like  manner,  with  regard  to  the  law  of  interest,  if 
it  is  possible  to  discover  an  interfering  force  analogous  to  the 
resistance  which  the  air  presents  to  the  falling  drop,  a  force 
which  prevents  the  rate  of  interest  from  becoming  adjusted  to 
the  final  efficiency  of  money  or  of  capital  goods,  the  cause  of  the 
discrepancy  between  our  recent  conclusion  and  the  previous 
one  will  have  been  brought  to  light. 

254.  Effect  of  the  Interest  Power  of  Money. — The  fact 
that  money  loaned  at  interest  renders  an  income  without 
further  labor  on  the  part  of  the  lender  is  a  powerful  incentive 
to  withhold  money  from  the  channels  of  exchange  and  to  direct 
it  into  the  channel  of  loans.  Lenders  not  only  endeavor  to 
lend  out  again  the  principal  of  the  loans  returned  to  them  by 
borrowers,  but  they  also  oft^'er  part  of  their  interest  income  to 
further  increase  their  loans.  They  naturally  strive  to  expend 
less  than  their  income  from  interest,  and  this  constitutes  a 
tendency  to  keep  the  current  E  below  the  current  7.  Thus 
only  a  portion  of  their  income  is  restored  to  circulation  by 
passing  through  the  channel  E,  while  the  remainder,  namely, 
7  —  E,  goes  into  circulation  by  passing  through  the  channel 


340  RESTRAINTS  ON  INDUSTRY  [255 

L,  and  this  causes  an  increase  of  loan  debts.  The  fact  that 
some  men  actually  spend  more  than  their  income,  dissipating  a 
portion  or  even  all  of  their  means,  is  here  negligible,  since  we 
survey  the  community  as  a  whole.  The  desire  to  increase  loan 
investments  obviously  predominates  so  that  E  is  naturally  less 
than  /,  at  least  while  "  business  is  good." 

Members  of  the  industrial  group  are  likewise  intent  on  sav- 
ing money  for  lending.  Merchants  and  manufacturers  fre- 
quently invest  their  money  savings  in  bonds  and  mortgages, 
and  many  of  the  workmen  whose  wages  little  more  than 
suffice  for  the  necessaries  of  life  take  what  they  can  spare  to 
savings  banks.  Thus  the  current  S  springs  from  a  natural 
desire  of  men  to  put  out  money  at  interest. 

If,  then,  E  tends  to  be  less  than  I,  the  difference  E — 8 
must  be  still  less,  and  the  natural  tendency  is  that  equation  (4) , 
I  =z  E  —  8,  will  not  be  satisfied. 

255.  Inevitable  Consequence. — It  is  not  difficult  to  foresee 
what  must  be  the  consequence.  Let  us  assume  that  the  differ- 
ence E  —  ;S'  is  really  less  than  I,  in  other  words,  that  I  —  E 
-|-  -S'  is  a  positive  quantity.  Since  formula  (3)  can  be  presented 
in  the  form 

I  —  E-{-8  =  dD  —  dV, 

a  glance  will  show  that  I  —  E  -\-  8  can  be  positive  only  if  either 
dD  is  positive  or  dV  is  negative.  A  positive  dD  indicates  a 
constantly  increasing  indebtedness,  while  a  negative  dV  signi- 
fies a  constantly  decreasing  volume  of  money  in  circulation. 
Hence  the  business  world  must  submit  to  the  one  or  the  other 
of  these  two  evils,  and  since  money  is  imperatively  needed  for 
the  transaction  of  busineas,  an  indefinite  reduction  of  money  in 
use  cannot  be  supposed.  The  business  world  has  practically  no 
choice  but  to  borrow  as  much  as  possible  of  the  money  offered 
for  loan  in  the  money  market,  and  a  gradual  increase  of  the 
volume  of  loan  debts  is  the  unavoidable  consequence  (281). 
But  with  every  increase  of  these  debts  the  payment  of  interest 
increases,  and  the  process  described  accelerates  until  debts  be- 
come over^vhelming  and  bankruptcy  ensues.  If  the  whole  in- 
dustrial world  were  consolidated  into  one  company  which  still 


255]  MONOPOLY  THEORY  OF  INTEREST  341 

remained  under  the  necessity  of  borrowing  money  on  interest 
from  the  financial  world,  this  company  could  not  possibly  escape 
ultimate  bankruptcy. 

This  statement  must  not  be  misunderstood.  It  does  not 
mean  that  every  independent  business  man  is  approaching  ruin, 
nor  even  that  a  large  percentage  of  them  are  in  this  condition. 
The  conclusion  must  be  interpreted  as  follows : 

The  active  field  embraces  the  debtor  class,  for  a  large 
number  of  business  men  are  working  in  part  with  borrowed 
capital.  The  fact  that  the  sum  total  of  these  debts  goes  on  in- 
creasing, as  just  shown,  together  with  the  fact  that  some  busi- 
ness men  succeed  in  lessening  their  debts,  simply  implies  that 
the  debts  of  others  are  more  than  correspondingly  increasing. 
The  victims  of  this  fateful  condition  find  that  in  the  so-called 
"  competitive  struggle  "  their  gross  income  is  insufficient  to 
cover  expenses.  In  the  vain  hope  of  making  good  the  deficit, 
they  continue  to  produce,  struggling  under  overpowering  dis- 
advantages and  hoping  for  better  times,  until  their  debts  equal 
and  finally  exceed  the  capital  they  employ.  In  the  end  they 
must  succumb  to  the  inevitable;  they  fail  (257,  280,  304,  340, 
345). 

The  conclusion  that  the  sum  total  of  loan  debts  tends  stead- 
ily to  increase,  especially  in  years  of  prosperity,  is  fully  con- 
firmed by  established  facts  (344).  The  constantly  increasing- 
public  indebtedness,  particularly  in  Europe,  is  viewed  by  many 
with  foreboding.  The  growth  of  bonded  debts  of  railroad  com- 
panies and  other  industrial  and  commercial  corporations,  par- 
ticularly in  America,  is  still  more  alarming.  The  expansion 
of  bank  deposits  is  usually  heralded  as  an  evidence  of  pros- 
perity, but  under  existing  conditions  it  has  also  its  dark  side, 
which  is  rarely  noted.  Since  about  seven-eighths  of  all  bank 
deposits  represent  commercial  loan  debts  (104),  it  is  obvious 
that  every  increase  of  bank  deposits  means  a  positive  increase 
of  interest-bearing  loan  debts. 

Still  more  positive  confirmation  of  our  theory  is  furnished 
by  the  fact  that  there  are  always  numbei's  of  business  men  who 
are  on  the  verge  of  bankruptcy,  brought  there,  not  for  lack  of 
a  normally  remunerative  business,  but  becaiLse  of  the  long- 


342  RESTRAINTS  ON  INDUSTRY  [256 

continued  and  constantly  increasing  drain  upon  their  business 
incomes  by  the  payment  of  interest  on  a  constantly  increasing 
debt.  In  fact,  business  failures  are  reported  by  mercantile 
agencies  without  intermission.  It  is  now  generally  assumed 
that  commercial  failures  which  are  not  positively  fraudulent  or 
traceable  to  evident  lack  of  business  capacity  are  due  to 
economic  reactions  for  which  bankrupts  cannot  be  held  respon- 
sible and  which  must  be  considered  as  an  unavoidable  concomi- 
tant of  business  activity. 

256.  Effect  of  Business  Failures  on  Pure  Interest. — The 
delinquency  of  borrowers  puts  on  the  lenders  a  loss  which  must 
be  covered  out  of  the  gross  interest.  In  other  words,  a  greater 
or  less  portion  of  the  gross  interest  is  to  cover  losses  involved  in 
lending.  This  latter  item  is  what  we  have  designated  by  the 
letter  B.  Any  increase  of  these  losses,  while  the  gross  interest 
G  remains  unchanged,  implies  a  corresponding  reduction  of  the 
net  interest  I  (274).  This  reduction  is  imposed  by  conditions 
which  the  lenders  cannot  control.  By  increasing  the  item  R, 
business  failures  cause  a  reduction  of  the  item  I  of  the  gross 
interest  until  it  falls  below  the  difference  E  —  S,  whether  or 
not  the  quantities  E  and  S  are  affected  at  the  same  time.  The 
preceding  excess  of  I  over  that  difference  is  then  reversed,  so 
that  in  the  long  run  the  equation  I  =  E  —  ;S  is  satisfied. 

While  a  falling  drop  of  water,  in  its  descent,  has  a  tendency 
to  follow  Newton's  law  of  falling  bodies,  it  is  prevented  from 
exceeding  a  certain  velocity  by  the  resistance  of  the  air.  In 
like  manner,  while  the  rate  of  interest  tends  to  adapt  itself  to 
the  final  efficiency  of  money,  the  total  amount  of  net  interest 
I  is  prevented  from  indefinitely  exceeding  the  difference  E  —  S 
by  the  physical  impossibility  of  the  industrial  world  continu- 
ously returning  to  the  financial  world  more  money  through  the 
channels  /  and  ;S^  than  it  receives  through  the  channel  E.  This 
is  the  interfering  factor  in  our  present  case;  the  analogy  with 
the  falling  rain  drop  is  in  fact  complete.  The  conflict  between 
final  efficiency  of  money  on  the  one  hand,  and  the  impossibility 
of  continuously  giving  more  money  than  is  received  on  the 
other,  results  in  the  constant  recurrence  of  failures  in  the 
business  world.    The  rate  of  interest  is  as  high  as  the  market 


257]  MONOPOLY  THEORY  OF  INTEREST  343 

can  bear  and  cannot,  for  this  reason,  rise  to  the  rate  that  would 
correspond  to  the  final  efficiency  of  money  (240).  The  equa- 
tions (5)  and  (6)  must  therefore  finally  be  accepted  as  ex- 
pressing the  law  of  interest  in  its  relation  to  money  loans,  the 
first  being  a  precise  statement,  the  second  an  approximation, 
giving  the  average  rate. 

257.  Rate  of  Capital  Interest. — For  reasons  just  explained 
(255)  there  are  at  all  times  and  in  all  trades  producers  who  are 
in  debt  to  the  extent  of  the  capital  they  employ.  From  the 
capitalist's  standpoint  these  are  obviously  the  marginal  pro- 
ducers, namely,  those  who,  as  regards  the  use  of  capital,  are 
working  under  the  rnost  unfavorable  circumstances  under 
which  production  is  being  continued  (62,  348).  The  interest 
paid  on  money  loans  by  the  marginal  producers,  that  is,  by 
the  producers  who  are  indebted  to  the  limit  of  their  capital, 
is  an  expense  which  they  cannot  escape  under  present  condi- 
tions. Their  expense  in  producing  the  goods  is  equal  to  the 
cost  (61)  of  conducting  the  business  plus  the  interest  paid  on 
the  borrowed  money.  The  more  fortunate  business  man  who 
owns  the  capital  employed  by  him  and  who,  therefore,  is  not 
under  obligation  to  pay  interest,  can  produce  the  same  goods  at 
the  mere  cost  of  conducting  the  business.  But  whatever  it  may 
cost  the  different  producers  to  make  the  goods,  the  selling  price 
is  the  same  for  all,  and  this  price  is  established  by  what  it 
costs  the  marginal  producer  to  make  the  goods.  Hence  those 
who  own  the  capital  they  employ  reap  a  profit  on  their  sales 
equal  to  the  money  interest  which  the  completely  indebted 
producer  must  pay,  and  this  profit  is  what  constitutes  capital 
returns  (265).  It  is  in  this  way  that  capital  goods  acquire 
what  appears  to  be  an  earning  power,  the  rate  of  which  is  the 
same  as  that  of  money  interest  (209). 

Referring  to  Fig.  13,  the  business  man  who  is  indebted  to 
the  extent  of  his  entire  capital  must  pay  money  interest  equal 
to  CE,  hence  the  cost  of  production  to  him,  counting  the  value 
FG  of  hLs  own  services  at  market  rates,  is  made  up  of  cost 
of  supplies  AB,  rent  BC,  interest  CE  and  wages  EG.  He  being 
the  marginal  producer,  this  cost  determines  the  market  value 


344  RESTRAINTS  ON  INDUSTRY  [258, 259 

of  the  products,  and  he  gets  only  the  value  FG  of  his  own 
services  as  net  income  from  his  business.  The  capitalist  who 
OAvns  all  his  capital,  except  the  land,  can  produce  at  a  cost 
equal  to  AB  -\-  BC  +  EG,  and  his  profits  from  the  sale  of  his 
products,  apart  from  his  wages  FG,  are  equal  to  CE.  Or  if 
he  is  partially  indebted  and  must  pay  money  interest  to  the 
amount  of  DE,  his  capital  profits  are  represented  by  CD. 

258.  Capital  Interest  an  Intra-Marginal  Profit. — We  are 

now  brought  to  a  recognition  of  the  fact  that  the  interest  sup- 
posed to  be  earned  by  capital  goods  is  after  all  analogous  to  the 
rent  of  land  (187),  at  least  in  that  both  are  intra-marginal 
profits.  These  profits  accrue  to  the  OA\Tier  of  capital  goods  by 
virtue  of  his  advantage  over  the  marginal  producer,  who  must 
pay  interest  on  an  amount  of  money  equal  to  the  capital  em- 
ployed. This  advantage  being  equal  to  the  interest  paid  by 
the  marginal  producer  accounts  for  the  fact  that  the  rate  of 
interest  returned  by  capital  goods  equals  the  rate  of  interest  on 
money  (131,  267). 

This  appears  to  conflict  with  a  former  conclusion  to  the 
effect  that  the  rate  of  capital  interest  tends  to  rise  to  the  final 
efficiency  of  capital,  while,  according  to  the  above,  it  rises  only 
to  the  actual  rate  of  money  interest,  which  we  found  to  be 
below  the  final  efficiency  of  money.  This  discrepancy  is  ex- 
plained by  the  recurrence  of  periods  of  business  stagnation, 
when  a  portion  of  capital  is  condemned  to  idleness.  Capital 
returns  are  correspondingly  reduced  and  do  not  rise  above  the 
rate  of  money  interest. 

The  reason  why  capital  has  the  power  to  ' '  earn ' '  an  income  is 
due  to  the  fact  that  money  has  the  power  to  command  interest. 
To  summarize :  (1)  the  power  of  money  to  command  interest  is 
due  to  the  inadequacy  of  its  volume  to  mediate  all  the  ex- 
changes necessary  to  permit  the  free  development  of  industry ; 
(2)  the  power  of  capital  goods  to  yield  ''earnings"  is  due  to 
the  advantage  possessed  by  the  intra-marginal  producer  who 
owns  his  capital  over  the  marginal  producer  who  is  in  debt  for 
all  his  capital  and  must  pay  interest  on  that  debt. 

259.  Currency  Laws  Examined. — Having  found  that  the 
power  of  money  to  command  interest  is  due  to  the  limitation 


2591  MONOPOLY  THEORY  OF  INTEREST  345 

of  the  voliinie  of  money,  and  that  this  limitation  results  from 
the  operation  of  prevailing  currency  laws,  we  have  next  to 
determine  in  what  way  and  to  what  extent  that  limitation  is 
justified.  To  this  end  we  may  here  apply  the  test  of  equity 
proposed  in  an  earlier  chapter  (20)  and  analyze  the  process 
by  which  money  is  produced,  with,  a  view  of  learning  the  nature 
of  the  rights  granted  and  the  duties  imposed  by  currency 
laws. 

]\Ioney  is  an  instrument  of  exchange  by  the  use  of  Avhich 
simple  barter  becomes  expanded  into  complex  barter,  into  ex- 
change through  purchase  and  sale  (83).  In  the  process  of 
simple  barter  the  exchange  of  one  thing  for  another  is  effected 
b,y  one  reciprocal  transaction,  while  in  the  process  of  exchange 
through  sale  two  transactions  are  required :  first,  a  giving  of 
goods  for  money,  and  then  a  giving  of  money  for  other  goods. 
These  two  transactions  or  sales  are  separated  by  a  sensible 
period  of  time,  and  during  this  time  the  money  serves  as  an 
evidence  that  the  holder  has  given  goods  before  receiving 
goods.  He  is  creditor  of  the  money  system  to  the  extent  of 
the  money  which  he  holds  (89).  But  this  necessarily  implies 
that  someone  else  has  received  goods  before  giving  goods, 
thereby  becoming  debtor  of  the  money  system  (92). 

In  any  system  of  credit  money  those  who  have  the  right  to 
issue  either  currency  or  bank  credit  acquire  through  such 
issue  the  means  wherewith  to  buy  before  they  need  sell,  and 
thus  to  receive  before  giving;  they  have  the  right  to  become 
debtors  of  the  money  system  and  to  remain  possessors  of 
wealth  they  do  not  own  so  long  as  the  currency  issued  by  them 
remains  in  circulation,  "We  must,  of  course,  not  confuse  the 
giving  of  goods  with  the  mere  pledging  of  goods.  The  issuer 
must  give  security  when  he  obtains  the  currency.  But  since 
he  retains  possession  of  the  wealth  pledged,  or  at  least  con- 
tinues to  enjoy  the  usufruct  of  the  pledge,  he  cannot  be  re- 
garded as  having  parted  with  wealth,  so  that  the  first  time  the 
money  is  given  for  goods  or  services,  the  giver  of  the  money, 
who  thus  becomes  its  issuer,  receives  goods  without  having 
given  goods. 

On  the  other  hand,  the  members  of  the  community  who 


346  RESTRAINTS  ON  INDUSTRY  [259 

have  consented  to  use  these  notes  as  money  have  thereby  taken 
upon  themselves  the  obligation  or  duty  to  give  before  receiv- 
ing, in  short,  to  become  and  remain  lenders  of  wealth,  or 
creditors,  to  the  extent  of  the  currency  which  they  individually 
hold  and  which,  as  a  community,  they  maintain  in  circulation. 
This  clearly  outlines  the  nature  of  the  rights  and  duties 
embraced  in  any  currency  system. 

These  considerations  do  not  strictly  apply  to  the  issuers 
of  gold  coin.  In  this  case  the  giving  and  receiving  of  actual 
wealth  are  coincident.  It  is  therefore  necessary  to  consider 
the  right  and  duty  involved  in  the  coinage  system  from 
another  point  of  view. 

Ordinarily  a  person  can  obtain  money  for  merchandise 
only  when  he  succeeds  in  finding  a  purchaser  for  his  goods. 
The  issuer  of  gold  coin,  on  the  contrary,  obtains  money  with- 
out going  to  this  trouble.  He  need  only  take  the  gold  to  the 
mint  and  have  it  converted  into  money  instead  of  selling  it 
as  merchandise  (93).  In  this  way  the  owner  of  gold  is 
saved  the  necessity  of  doing  the  merchant's  work.  Gold  is 
therefore  a  merchandise  which  can  be  converted  into  money 
without  the  effort  and  uncertainties  attending  the  finding  of 
a  purchaser;  its  market  is  assured.  The  value  of  all  other 
merchandise  can  become  realized  only  through  the  efforts  of 
the  merchant  to  find  a  purchaser,  and  in  this  respect  that 
value  is  precarious.  Such  is  not  the  case  with  any  metal 
admitted  to  free  coinage.  This  unique  position  of  the  money 
metals  misled  those  economists  of  the  eighteenth  centuiy 
known  as  the  Mercantilists  into  the  belief  that  nothing  but 
gold  and  silver  constitute  the  wealth  of  a  country. 

It  is  thus  clear  that  the  owner  of  goods  in  the  form  of  gold 
metal  is  accorded  by  law  the  right  to  have  his  goods  coined 
into  money,  while,  on  the  other  hand,  the  owners  of  all  other 
goods  are  not  only  under  the  necessity  of  first  finding  a 
purchaser  for  them  before  they  can  get  money,  but  are 
furthermore  in  duty  bound  to  accept  the  proffer  of  the  gold 
metal  in  coined  form  as  money  in  exchange  for  their  goods. 
This  clearly  presents  the  correlative  conditions  of  right  and 
duty  embraced  in  the  coinage  system. 


260]  MONOPOLY  THEORY  OF  INTEREST  347 

260.  Existing  Currency  Laws  Inequitable. — It  may  seem 
strange  to  describe  the  consent  of  sellers  to  accept  money  in 
exchange  for  goods  as  a  duty  or  obligation,  in  the  face  of  the 
fact  that  all  are  really  striving  to  make  such  exchange.  But 
we  must  remember  that  coin  and  currency  notes  can  become 
money  only  by  virtue  of  the  general  consent  to  accept  them  in 
trade.  This  is  really  an  agreement  to  give  actual  wealth  in 
exchange  for  a  mere  credit  instrument  (93),  and  such  accept- 
ance of  the  money  in  accordance  with  the  agreement  is  mani- 
festly in  the  nature  of  an  obligation  or  duty.  Though  this 
duty  is  not  usually  regarded  as  onerous,  it  still  remains  a 
duty,  and  the  question  before  us  is  whether  those  upon 
whom  that  duty  is  imposed  are  accorded  a  corresponding 
right  (20). 

To  be  sure,  a  right  to  issue  currency  cannot  be  granted 
unconditionally;  certain  provisions  must  be  observed  with- 
out which  a  sound  currency  is  impossible.  Chief  among  these 
is  the  obligation  to  pledge  security,  for  without  security  there 
can  be  no  credit  in  the  economic  sense.  Making  the  right  to 
issue  currency  contingent  on  furnishing  adequate  security  is 
therefore  not  an  undue  requirement.  But  in  so  far  as  addi- 
tional and  arbitrary  conditions  are  imposed  by  law,  all  who 
must  needs  submit  to  the  obligation  of  accepting  the  currency 
are  unduly  restricted  in  the  exercise  of  the  corresponding 
right  of  issuing  it  (261).  And  such  is  indeed  the  effect  of 
present  currency  laws. 

Arbitrary  restrictions  on  the  right  to  issue  currency  are 
imposed  in  three  different  ways:  (1)  by  specifically  limiting 
the  maximum  amount  of  currency  to  be  issued;  (2)  by  too 
narrowly  prescribing  the  kind  of  security  acceptable  as  a 
basis  for  currency;  and  (3)  by  imposing  a  tax  on  the  issue 
of  currency  exceeding  insurance  against  risk  of  loss  through 
depreciation  of  the  security. 

Let  us  more  closely  consider  the  nature  of  these  restrictions 
in  thrdr  order. 

First:  "When  laws  establish  a  definite  limitation  to  the 
amount  of  currency  that  may  be  issued,  applicants  for  addi- 
tional   issues  miLst   be   refused,   even   though   they   offer  to 


348  RESTRAINTS  ON  INDUSTRY  [260 

comply  with  all  economically  necessary  conditions.  Such  laws 
are  an  arbitrary  denial  of  a  right  to  Avhich  all  are  justly  en- 
titled who  submit  to  the  corresponding  duty  of  accepting  the 
currency  as  a  medium  of  exchange.  The  laws  which  prescribe 
that  banks  must  hold  a  certain  reserve  of  lawful  money,  while 
yet  the  amount  of  lawful  money  is  arbitrarily  limited  by  law, 
belong  to  this  category. 

Second :  The  securities  acceptable  under  the  law  as  a  basis 
for  cui'rency  issues  may  exist  in  quantities  insufficient  to 
cover  the  need  for  currency.  That  such  is  now  the  case  in 
regard  to  national  bank  currency,  for  which  only  national 
bonds  are  acceptable  as  security,  is  showTi  by  the  fact  that 
these  bonds,  though  bearing  a  very  low  rate  of  interest,  have 
all  along  been  at  a  premium. 

The  claim  that  this  limit  is  imposed  in  order  to  make  the 
currency  safe  cannot  be  sustained,  for  the  routine  of  deposit 
banking  demonstrates  conclusively  that  carefully  scrutinized 
and  assured  business  credits  can  be  used  as  money  with  safety. 
About  seven  eighths  of  the  assets  upon  which  bank  credit 
rests  consist  of  business  credits,  and  bank  credit  is  constantly 
doing  the  work  of  money.  While  business  credits  are  not 
well  adapted  for  acceptance  as  security  by  the  government, 
there  are  other  securities,  like  real  estate,  available  in  abund- 
ance. It  is  decidedly  a  violation  of  justice  to  confine  the  kind 
of  wealth  acceptable  as  security  for  the  issue  of  currency  to 
one  or  a  few  forms  of  property,  unless  there  exists  so  much 
of  this  property  that  its  use  for  the  purpose  will  engage  but  a 
fraction  of  the  supply  and  therefore  will  not  cause  an  appre- 
ciation of  its  value.  That  federal  bonds  do  not  conform  to 
this  condition  is  indicated  above. 

Third:  The  imposition  of  any  tax  beyond  necessary  in- 
surance on  the  right  to  use  credit  as  a  medium  of  exchange  is 
virtually  an  arbitrary  limitation  of  a  right  which  in  justice 
inheres  to  all  who  submit  to  the  corresponding  obligation.  A 
tax  covering  insurance  against  default  of  the  credit  cannot 
be  viewed  as  a  tax  on  the  conversion  of  assured  credit  into 
money.  But  every  additional  tax  is  indefensible.  It  has  the 
same  effect  that  a  specific  limitation  of  the  volume  of  currency 


261]  MONOPOLY  THEORY  OF  INTEREST  349 

would  have.  This  can  be  elucidated  by  the  diagram  Fig.  22, 
where  the  curve  EE'  represents  the  decreasing  efficiency  of 
consecutive  increments  of  money.  It  is  manifest  that  a  tax 
equal  to  Oi  has  the  effect  of  forbidding  the  issue  of  that 
portion  of  currency  which  lies  beyond  the  point  V,  since  the 
efficiency  of  the  increments  located  between  V  and  E'  is  not 
enough  to  cover  the  tax.  The  same  labor  that  under  the 
fullest  freedom  of  exchange  would  produce  an  amount  repre- 
sented by  the  area  OE'E,  cannot  economically  produce  more 
than  an  amount  corresponding  to  OVaE  (262),  Labor  is 
forcibly  prevented  from  using  the  most  advantageous  methods 
of  production;  nature's  forces  are  not  utilized  to  the  best 
advantage  known  in  the  ai'ts.  jMoreover,  of  the  reduced 
product  an  amount  equal  to  the  area  OVai  must  be  devoted 
to  the  payment  of  interest  to  the  money-lender,  and  the 
producer  has  only  the  remainder  iaE  out  of  which  to  cover  all 
other  costs,  including  his  own  wages  and  those  of  his  employes. 

So  long  as  any  of  these  three  impediments  are  placed  in 
the  way  of  freedom  of  exchange,  the  public,  bound  by  the 
duties  imposed  by  the  currency  laws,  is  deprived  of  the 
corresponding  rights,  and  the  laws  are  to  that  extent 
inequitable. 

261.  Pure  Interest  a  Monopoly  Tax. — The  advocates  of 
laws  obstructing  the  issue  of  currency  do  not  deny  that  the 
purpose  of  such  laws  is  to  limit  the  volume  of  money.  They 
believe  that  the  stability  of  currency  requires  this  limitation. 
But  they  fail  to  realize  that  this  constitutes  an  interference 
with  the  freedom  of  exchange,  whereby  a  monopoly  of  the 
impersonal  type  (232)  is  created,  which  has  a  twofold  effect. 
On  the  one  hand  it  restricts  the  right  of  the  producers  of  wealth 
freely  to  exchange  the  products  of  their  labor,  and  since  ex- 
changes are  indispensable  to  modern  production,  it  virtually 
constitutes  a  restriction  of  the  right  to  work  (291,  347) .  On  the 
other  hand,  it  imparts  to  money  directly,  and  to  capital  goods 
indirectly,  the  power  of  returning  continuous  unearned  in- 
comes to  lenders  of  money  and  to  owners  of  capital.  That 
this  monopoly  is  sustained  by  laws  that  are  essentially  in- 
equitable has  been  demonstrated  above  (260).     The  right  to 


350  RESTRAINTS  ON  INDUSTRY  [262 

use  assured  credit  as  a  medium  of  exchange  has  been  trans- 
formed into  a  privilege.  It  is  this  privilege  which  gives  to 
money  its  interest  commanding  power.  Interest  is  clearly 
traceable  to  a  monopoly  upheld  hy  law. 

At  first  glance  it  may  appear  that  this  conclusion  is  incon- 
sistent with  the  fact  that  interest  was  paid  for  the  use  of 
money  in  ancient  times,  when  currency  laws  were  yet  un- 
known. But  a  closer  examination  of  the  subject  will  clear 
away  this  apparent  inconsistency. 

In  the  earlier  stages  of  civilization  the  risk  assumed  by  the 
lender  of  money  was  much  greater  than  it  is  to-day,  and  the 
main  item  of  the  interest  charge  was  insurance  against  risk. 
Such  portion  of  that  charge  as  constituted  pure  interest  was 
doubtless  due  to  the  general  scarcity  of  money  which,  in  the 
absence  of  the  use  of  credit  as  a  medium  of  exchange,  was 
confined  to  the  precious  metals,  of  which  but  very  limited 
quantities  were  used  as  money  (329).  In  the  course  of  time 
the  precious  metals  have  been  supplemented  and  to  some  ex- 
tent displaced  by  the  application  of  credit  as  a  substance  of 
money,  but  while  the  natural  cause  of  the  insufficiency  of 
money  has  thus  been  removed,  another  cause  to  the  same 
effect  has  come  into  force,  namely,  the  arbitrary  limitation 
of  the  circulating  medium  by  law. 

262.  The  Power  of  the  Money  Monopoly. — In  the  light 
of  these  conclusions  it  becomes  possible  to  survey  the  extent 
of  the  harm  which  the  money  monopoly  is  capable  of  inflicting 
upon  the  community  (235).  The  greatest  injury  the  public 
could  possibly  suffer  in  this  direction  is  that  which  would 
result  from  a  total  abolition  of  money  in  all  its  various  forms. 
This  would  manifestly  reduce  the  community  to  that  primitive 
state  in  which  each  individual  must  make  with  his  own  hands 
that  which  he  wants. 

But  forcing  the  scarcity  of  money  to  the  extreme  of  its 
total  elimination  would  benefit  no  one.  In  the  money 
monopoly,  as  in  all  others,  a  certain  degree  of  moderation  of 
its  exercise  affords  a  maximum  benefit  to  those  who  are  in 
position  to  gain  profit  from  it  (,234).  How  nearly  this  degree 
is  approached  under  the  prevailing  limitations  of  the  currency 


263]  MONOPOLY  THEORY  OF  INTEREST  351 

cannot  be  judged.  At  all  events,  the  volume  of  money  per- 
mitted to  the  community  by  our  laws  is  such  that  industrial 
progress  is  only  obstructed,  not  prevented,  but  to  whatever 
extent  the  monopoly  is  operative,  the  country's  industries 
suffer  thereby. 

Every  branch  of  industiy  and  commerce  feels  the  evil  in- 
fluence of  this  monopoly.  It  ramifies  through  every  province 
of  activity,  because  every  branch  of  industry,  every  channel 
of  commerce,  depends  on  exchanges,  and  so  far  as  this 
monopoly  restricts  exchanges,  it  has  the  effect  of  hampering 
all  productive  efforts.  It  causes  a  certain  amount  of  labor 
to  go  to  waste,  partly  by  reason  of  labor's  inefficient  utiliza- 
tion (159,  260),  and  partly  through  the  enforced  idleness  of 
some  labor  (270).  It  is  impossible  to  conceive  of  any  other 
form  of  monopoly  which  has  so  potent  and  at  the  same  time 
so  injurious  an  influence  on  every  individual,  every  com- 
munity, every  nation  and  on  the  whole  economic  world. 

263.  Service  Rendered  by  the  Lender  of  Money. — The 
gross  income  from  money  loans,  the  return  commonly  called 
"interest,"  accrues  to  the  lender  of  money  in  return  for 
three  different  services  rendered  by  him,  corresponding  to  the 
three  items  of  which  gross  interest  consists  (139a). 

The  first  is  the  service  of  attending  to  the  business  of  lend- 
ing. If  the  loan  is  one  of  long  time,  like  a  mortgage  or  a 
bonded  loan,  this  item  makes  a  very  small  part  of  the  whole. 
Those  who  make  a  business  of  negotiating  such  loans  and 
attending  to  their  details,  usually  obtain  a  compensation 
which,  being  determined  by  competition,  represents  the  aver- 
age value  of  this  service.  If  the  lender  himself  does  this  work 
instead  of  hiring  an  agent  for  the  purpose,  he  may  be  con- 
sidered as  having  earned  this  portion  by  his  personal  effort. 

The  service  so  rendered  has  a  specific  usefulness.  What- 
ever the  method  of  its  issue,  the  currency  must  be  directed 
into  the  channels  where  it  is  needed.  This  is  the  normal 
function  of  the  banker  and  the  money-lender,  who  thus  per- 
form a  definite  service  to  the  community. 

In  the  case  of  discounts  by  deposit  banks,  the  work  done  for 


352  RESTRAINTS  ON  INDUSTRY  [264 

the  borrower  incidentally  includes  various  services  in  addition 
to  that  of  attending  to  the  details  of  the  loan  proper,  services 
which  are  not  entailed  in  the  case  of  ordinary  long-time  loans. 
The  work  of  effecting  the  clearance  of  exchanges  through  the 
check  system,  the  collection  of  notes,  drafts,  etc.,  may  be  cited 
as  the  most  important  of  these  extraneous  services,  and  the 
payment  for  these  is  taken  out  of  the  discounts  (139&). 

The  second  form  of  service  is  that  of  insuring  the  credit 
of  the  borrowers.  Eloney-lenders  invariably  run  some  risk 
of  having  difficulty  and  possible  expense  in  the  ultimate  col- 
lection of  their  dues,  or  of  losing  a  part  or  all  of  the  sum 
loaned,  and  according  as  the  risk  appears  greater  or  less, 
lenders  of  money  are  correspondingly  reluctant  to  lend,  and 
the  borrowers  have  accordingly  to  pay  the  second  item  of  in- 
terest, the  insurance  premium,  to  overcome  this  reluctance. 
In  the  concourse  of  the  money  market  this  premium  is  such 
that,  in  the  general  average,  losses  of  this  nature  are  covered 
by  this  second  item  (220).  The  payment  of  this  item  on  the 
part  of  the  borrowers  virtually  places  the  lenders  in  the  posi- 
tion of  insurers  of  the  borrowers'  credit,  these  payments  by  all 
borrowers  in  general  covering  the  losses  sustained  by  the 
lenders  in  individual  cases. 

264.  The  Third  Item  of  Gross  Interest. — It  is  generally 
held  that  the  service  for  which  pure  interest,  the  third  item 
of  the  gross  interest,  is  paid  to  the  lender,  consists  in  furnish- 
ing capital  to  the  borrower.  That  this  view  is  erroneous  has 
been  proven  above  (210&). 

The  real  nature  of  the  service  which  lenders  render  to 
borrowers,  apart  from  the  services  already  mentioned,  can 
best  be  studied  by  considering  a  loan  as  being  what  it  really 
is,  namely,  an  exchange  of  two  credits,  and  then  carefully 
comparing  that  which  is  given  by  the  lenders  with  that  which 
is  given  by  the  borrowers. 

When  a  borrower  obtains  a  loan,  he  gives  his  promise  to 
pay,  his  credit,  and  gets  in  return  money,  which  is  but  another 
form  of  credit.  Our  inquiry  is  therefore  narrowed  down  to 
the  question  as  to  what  it  is  that  distinguishes  the  credit  given 
by  the  borrower  from  that  given  by  the  lender,  for  in  that 


264]  MONOPOLY  THEORY  OF  INTEREST  353 

distinction  Ave  must  look  for  the  real  nature  of  the  service 
for  which  the  third  item  of  interest  is  demanded  by  the  lender 
and  paid  by  the  borrower. 

The  lender  may  give  lawful  money,  or  bank  notes,  or 
some  form  of  bank  credit,  that  is,  an  order  on  a  bank  to 
transfer  bank  credit  from  the  lender  to  the  borrower.  That 
which  is  furnished  by  the  lender  is  either  a  credit  authorized 
as  a  medium  of  exchange  by  law,  or,  in  case  he  gives  non- 
legal-tender  notes  or  bank  checks,  a  credit  permitted  to  be  used 
as  a  medium  of  exchange  under  the  law.  The  credit  given  by 
the  borrower  must  be  presumed  to  be  as  sound  as  that  given 
by  the  lender,  inasmuch  as  a  premium  for  its  insurance  is 
being  paid  to  the  lender.  The  only  difference  between  the  two 
credits  exchanged  is  that  the  credit  furnished  by  the  lender  is 
monetized  credit,  that  is  to  say,  credit  placed  within  the  range 
of  that  communal  agreement  that  makes  it  acceptable  as  a 
medium  of  exchange,  while  that  furnished  by  the  borrower  is 
not  monetized  credit  (238). 

There  is  no  good  reason  why  the  borrower's  credit,  properly 
secured  and  insured,  cannot  be  put  into  a  fonn  in  which  it  can 
be  utilized  as  a  medium  of  exchange  (103)  without  the  pay- 
ment of  more  than  the  cost  of  the  labor  involved  and  of  in- 
surance. There  is  nothing  to  prevent  it  but  the  restraint  of 
law.  The  business  man  in  need  of  a  medium  of  exchange  must 
turn  to  the  money  lender  for  help  and  pay  him  interest  for  a 
service  which  consists  of  nothing  more  than  an  intermediation 
in  the  monetization  of  credit.  The  labor  of  this  intermedia- 
tion is  naturally  paid  for  by  the  first  item  of  gross  interest, 
and  there  would  be  no  additional  cost  but  for  the  provisions 
of  law  which  obstruct  the  monetization  of  credit  (341).  This 
third  item  of  gross  interest,  usually  the  largest  fraction  of 
that  charge,  is  in  fact  due  wholly  to  misdirected  interference 
of  law  with  the  freedom  of  exchange. 

If  the  case  is  viewed  from  still  another  standpoint,  our 
conclusions  are  further  verified. 

Although  bank  credit  as  such  is  no  more  reliable  than  any 
other  credit  that  is  equally  assured,  it  is  specially  privileged, 
within  certain  limitations  of  law,  to  be  used  as  money.  The 
23 


354  RESTRAINTS  ON  INDUSTRY  [264 

transformation  of  bank  credit  into  money  is  effected  through 
the  general  consent  of  the  community  to  accept  notes  issued 
by  the  bank  and  checks  dra^vn  on  the  bank  in  pajonent  for 
goods  sold  or  for  services  rendered.  It  is  the  community 
which  converts  hank  credit  into  money.  It  is  the  people  who 
perform  that  service  for  which  the  banker  obtains  the  third 
item  of  the  gross  interest.  Indeed,  those  very  members  of  the 
community  who  play  the  largest  part  in  the  performance 
of  that  service,  the  business  men,  must,  when  they  become 
borrowers,  buy  back  at  a  price  the  very  service  which  they, 
in  common  with  others,  have  performed  gratuitously.  The 
business  men  who  borrow  are  the  real  issuers  of  bank  notes 
(102)  and  bank  credit  (105).  They  are  the  debtors  in  regard 
to  the  currency  and  bank  credit  issued  through  them,  while 
the  people  who  accept  the  currency  and  the  bank  credit  be- 
come thereby  the  creditors  of  these  money  systems,  the  lenders 
of  the  actual  capital.  The  bank  is  merely  an  intermediary 
agent  in  the  process  of  issue.  The  issuers  or  debtors  do  in- 
deed pay  interest  on  these  debts,  but  they  pay  it  to  the  inter- 
mediaries of  the  issue  and  not  to  the  creditors,  the  holders  of 
the  notes  or  the  owners  of  the  bank  credit.  The  banker  earns 
only  the  "cost"  and  the  "risk"  items  of  the  gross  interest, 
in  that  he  performs  the  agent's  work  and  effects  the  insur- 
ance of  the  possible  risk  attached  to  the  real  issuer's  security. 
But  he  gets  more  than  what  he  earns;  he  retains  all  three 
items  of  interest.  The  users  of  the  currency,  those  who  are 
the  real  creditors  of  the  case,  the  lenders  of  the  real  capital, 
and  to  whom  pure  interest,  the  third  item  of  the  gross  interest, 
should  properly  go,  if  it  were  true  that  the  lender  of  capital 
goods  is  entitled  to  interest,  do  not  receive  it  and  do  not  even 
expect  it  (210a).  Through  the  limitation  of  money  by  pro- 
vision of  law,  which  results  in  the  impersonal  monopoly  of 
money,  the  borrower  of  money  must  pay  to  the  dealer  in 
money  not  only  his  proper  earnings,  but  also  the  third  item 
of  gross  interest  in  the  form  of  interest  proper.  It  is  clear 
that  the  pajTnent  of  the  third  item  of  interest  is  in  the  nature 
of  a  tax  paid  by  those  who  Avork  for  the  privilege  of  using 
their  own  credit  as  a  medium  for  exchanging  their  products, 


2651  MONOPOLY  THEORY  OF  INTEREST  355 

a  tax  imposed  through  the  operation  of  law-protected  im- 
personal and  inequitable  monopoly. 

265.  Service  Rendered  by  the  Capitalist. — Generally 
speaking,  that  portion  of  the  income  of  an  industrial  group 
which  goes  to  the  owner  of  the  capital  goods  employed  con- 
sists of  two  items  (139a),  namely  (1)  amortization,  that  is  to 
say,  compensation  for  the  wear  and  tear  and  consequent  de- 
preciation of  his  capital,  and  (2)  compensation  for  the  use 
of  that  capital.  Personal  services  cannot  be  considered  here 
since  these  are  excluded  from  the  function  of  the  capitalist 
by  our  definition  of  that  function  (143a). 

In  the  first  capacity  the  capitalist  is  either  a  contributor 
of  the  capital  goods  utilized  by  the  industrial  group,  or,  more 
frequently,  a  contributor  of  the  money  with  which  those  goods 
are  bought  and  aggregated  to  the  end  in  view.  His  position 
difi:ers,  however,  from  that  of  a  money-lender  in  that  he  is  not 
entitled  to  receive  a  stated  amount  of  money  at  a  given  future 
time,  but  is  the  owner  of  the  capital  goods  bought  with  his 
money.  Being  the  owner  of  that  capital,  there  accrues  to  him, 
in  the  average,  insurance  in  the  measure  in  which  he  runs  the 
risk  of  losing  it,  and  amortization,  as  the  goods  deteriorate. 
Usually  these  items  are  not  paid  to  the  capitalist,  but  are 
applied  to  make  good  the  deterioration  of  the  capital  by 
insurance,  repair  and  replacement,  in  order  that  its  value 
may  remain  intact.  Thus,  in  this  capacity  the  capitalist 
either  receives  in  instalments,  or  retains  undiminished  as 
owner,  the  equivalent  of  what  he  gives,  nothing  more.  In- 
deed, as  supplier  of  the  capital  goods  and  eventually  recipient 
of  amortization,  he  is  not  to  be  regarded  as  a  member  of  the 
group,  being  in  this  respect  nothing  more  than  an  agent  in 
the  purchase  of  the  capital  goods  from  other  groups  (1396, 
1436,  157). 

When  we  come  to  consider  the  "capitalist"  in  his  second 
capacity,  that  of  owner  of  the  capital  employed  by  a  given 
group,  his  position  must  be  carefully  distinguished  from  that 
of  the  employer,  with  which  it  is  often  erroneously  confused. 
The  income  that  normally  accrues  to  the  employer  consists  of 
wages  which  are  the  recompense  for  the  work  involved  in 


356  RESTRAINTS  ON  INDUSTRY  [26G 

managing  the  business.  The .  capitalist  as  such  is  a  passive 
agent,  one  who  simply  leaves  the  use  of  his  capital  to  the 
productive  group  (154),  without  doing  any  work  himself. 

Examining  the  position  of  the  capitalist,  we  find  that  he 
replaces  the  money-lender,  by  enabling  the  group  to  do  its 
work  of  production  without  having  recourse  to  borrowed 
money.  His  service  is  therefore  analogous  to  that  of  the 
money-lender,  and  his  recompense  for  that  service  can  have 
no  other  basis  than  has  the  recompense  paid  for  the  service  of 
the  money-lender  (257).  The  capitalist's  claim  to  recom- 
pense is  in  fact  on  a  par  with  the  money-lender's  claim  to 
interest,  and  pure  money  interest  being  due,  as  we  have 
found,  to  the  operation  of  the  impersonal  money  monopoly, 
pure  capital  interest  must  be  traced  to  the  same  origin  (348). 

The  processes  of  exchange,  absolutely  necessary  to  the 
modern  processes  of  production,  are  hampered  by  legal  ob- 
stacles, which  the  services  of  the  money-lender  and  of  the 
capitalist  help  to  overcome.  So  long  as  these  legal  obstacles 
exist,  and  only  so  long,  do  the  money-lender  and  the  capitalist 
render  a  service  for  which  there  accrues  to  them  an  income 
not  earned  by  them,  but  gained  for  them  through  the  com- 
plex workings  of  the  existing  monetary  system. 

266.  Abundance  of  Real  Capital. — While  the  inadequacy 
of  capital  to  employ  labor  at  its  maximum  efficiency  is  that 
which  accounts  for  the  power  of  active  capital  to  bring  a 
revenue,  this  inadequacy  is  in  striking  contrast  with  the 
fact  that  the  products  of  labor  from  which  capital  can  be 
aggregated  are  so  plentifully  offered  in  the  market  that  the 
difficulty  of  finding  purchasers  for  them  is  commonly  ascribed 
to  "overproduction"  (241)  and  that  the  opening  of  new 
markets  for  surplus  products  is  regarded  as  essential  to 
national  prosperity.  Moreover,  unemployed  labor,  able  and 
willing  to  produce  still  more,  is  so  abundant  that  the  problem 
of  providing  employment  for  idle  workmen  is  forcing  itself 
upon  the  attention  of  the  whole  world.  Insurance  against 
unemployment  has  not  only  been  proposed,  but  in  some 
countries  has  been  actually  put  into  practice.  What  is  it 
that  prevents  the  surplus  of  goods  in  the  market,  and  the 


206]  MONOPOLY  THEORY  OF  INTEREST  357 

labor  crying  for  employment,  from  being  utilized  to  supply 
the  deficiency  of  capital?  What  else  than  the  inadequacy  of 
the  medium  of  exchange,  without  which  neither  the  capital 
goods  already  produced,  nor  the  labor  with  which  to  produce 
more,  can  be  made  available  in  the  process  of  production. 

The  most  convincing  proof  of  the  superabundance  of  ex- 
isting capital  goods  is  the  universal  willingness  of  their 
owners  to  give  them  up  in  return  for  money.  In  selling  things 
for  the  credit  instrument  money,  the  producers  part  with 
present  goods  in  exchange  for  a  right  to  obtain  goods  in  the 
future,  and  for  this  virtual  loan  of  material  wealth  the  holder 
of  the  right  receives  no  interest.  The  total  amount  of  actual 
wealth  so  loaned  without  interest  by  the  community  equals 
the  volume  of  all  money  in  use,  and  that  the  members  of  the 
community  are  willing  to  lend  out  still  more  wealth  on  the 
same  terms  is  shown  by  the  eagerness  of  manufacturers  and 
merchants  to  give  up  their  goods  for  money,  and  by  their 
endeavors  to  find  new  markets. 

Those  who  really  receive  interest,  the  lenders  of  money, 
are  not  lenders  of  capital  goods  when  they  lend  money.  They 
only  give  credit  in  the  fonn  of  money  in  exchange  for  an 
equivalent  credit  in  the  form  of  the  borrower's  security,  the 
only  difference  being  that  the  latter,  though  equal  in  value  to 
the  former,  is  disqualified  by  law  from  being  used  as  a  medium 
of  exchange.  These  facts  clearly  show  that  it  is  not  the  real 
capital,  the  goods  already  produced  by  labor,  but  the  medium 
of  exchange,  which  is  scarce,  and  that  money  interest  is  not 
paid  for  the  giving  up  of  present  in  return  for  future  goods, 
but  for  the  loan  of  an  instrument  which  is  privileged  to 
effect  exchanges. 

It  is  an  error  to  assume  that  the  lender  of  money  sur- 
renders capital  to  the  borrower;  it  is  an  error  to  say  that 
the  lender  of  money  practises  "abstinence"  or  "waiting,"  or 
that  he  agrees  to  take  "future  goods"  in  return  for  "present 
goods."  There  is  a  flaw  in  this  reasoning,  for  if  the  lender  has 
given  present  goods  in  return  for  future  goods,  he  has  done 
so  when  he  acquired  the  money  in  the  process  of  selling  his 
goods,  and  if  there  were  really  an  economic  force  which  tends 


358  RESTRAINTS  ON  INDUSTRY  [2C7 

to  accord  a  recompense  to  him  who  gives  present  goods  in 
exchange  for  future  goods,  the  owner  of  money  should  and 
would  obtain  interest  until  he  gets  the  goods  to  which  he  is 
entitled  in  exchange  for  the  money. 

The  current  academic  explanations  of  interest  which  as- 
sume, directly  or  indirectly,  a  scarcity  of  capital,  fail  for 
two  reasons.  In  the  first  place,  it  is  not  true  that  there  is  a 
scarcity  of  capital  goods,  the  fact  being  that  such  goods  can 
be  obtained  in  abundance  without  the  payment  of  interest  in 
exchange  for  mere  evidences  of  debt,  provided  only  that  these 
evidences  are  acceptable  as  a  medium  of  exchange.  In  the 
second  place,  the  lending  of  money  is  not  a  lending  of  goods, 
but  merely  an  exchange  of  a  credit  which  is  qualified  by  law 
or  convention  to  circulate  as  money  for  a  credit  which  is 
not  so  qualified. 

267.  Summary. — Our  investigation  has  now  led  us  to  an 
understanding  of  how  and  why  the  net  income  from  pro- 
duction is  divided  into  wages  and  capital  profits,  the  latter 
comprising  rent,  capital  interest  and  money  interest.  "We 
have  also  found  why  it  is  that  the  rate  of  interest  on  money, 
the  rate  of  profits  afforded  by  land  and  the  rate  of  gains 
returned  by  invested  capital  are  practically  equal  (131,  185, 
258).  That  the  three  forms  of  capital  are  competitively 
related  has  thus  been  fully  demonstrated. 

At  an  earlier  stage  of  our  investigation  (155),  when  con- 
sidering the  division  of  the  net  income  of  productive  groups 
into  wages  and  profits,  we  had  before  us  nothing  that  would 
indicate  whether  labor  or  capital  has  the  prior  claim.  The 
data  requisite  for  a  complete  answer  to  this  question  are 
however  now  fully  before  us. 

Production  being  effected  by  the  co-operation  of  various 
specialized  groups,  the  revenue  derived  from  the  sale  of  the 
finished  products  has  first  to  be  divided  among  these  groups. 
This  division  is  made  through  the  payments  for  raw  materials, 
means  of  production  and  other  services  bought  by  each  group 
from  its  predecessors.  That  this  sharing  is  governed  by 
competition  has  been  fully  shown  (153). 


2671  MONOPOLY  THEORY  OF  INTEREST  359 

The  part  which  is  retained  by  each  group,  namely,  its  net 
income,  measures  in  the  average  the  value  of  the  services 
rendered  by  all  its  various  participants,  and  this  value  is 
shared  among  them. 

Dealing  with  averages,  we  may  distinguish  three  prin- 
cipal shares,  namely,  wages  for  work  done,  rent  for  the  use 
of  the  land,  and  capital  interest,  the  whole  or  part  of  which 
may  take  the  form  of  money  interest,  if  the  capital  goods  used 
by  the  group  are  whollj^  or  in  part  bought  with  borrowed 
money. 

The  division  is  determined  by  certain  economic  forces,  but 
it  is  clear  that  only  two  shares  require  specific  determination, 
the  remainder  making  up  the  third  share. 

The  first  part  segregated  from  the  total  is  rent.  The 
operation  of  the  economic  forces  through  which  rent  accnies 
to  the  owner  of  the  land  has  been  sufficiently  discussed  before 
(170-180).  In  regarding  the  sum  total  Oq  of  a  given  kind 
of  products  that  is  brought  to  a  given  market.  Fig.  20  repre- 
sents the  process  of  the  division,  which  is  detennined  by  two 
primary  factors.  One  of  them  comprises  the  various  natural 
qualities  of  all  the  land  used  for  the  purpose,  as  they  affect 
the  effort  required  for  the  production  of  the  different  ele- 
ments making  up  the  supply.  They  find  expression  in  the 
supply  curve  88'.  The  other  comprises  the  aggregate  of 
those  conditions  which  govern  the  demand  and  which  are 
represented  by  the  demand  curve  DD'.  The  margin  of  cul- 
tivation becomes  located  at  the  intersection  a,  the  ordinate  qa 
of  which  determines  the  price  of  the  product.  The  total 
product  having  a  market  value  represented  by  the  area  Oqap, 
and  the  cost  of  producing  it  being  represented  by  the  area 
OqaS,  the  rent  which  accrues  to  the  owners  of  the  land  utilized 
is  proportionate  to  the  area  8ap. 

The  share  of  the  net  income  which  accrues  to  the  capitalist 
and  the  money-lender  combined  depends  upon  the  current 
rate  of  interest  and  on  the  amount  of  capital  that  can  be 
employed  advantageously.  Both  these  factors  are  determined 
in  their  own  way.  How  the  rate  of  interest  is  dependent  on 
the  balance  of  the  two  currents  E  and  8,  Fig.  25,  flowing  be- 


360  RESTRAINTS  ON  INDUSTRY  [267 

tween  the  financial  and  the  industrial  field,  and  representing 
expenditures  and  savings  respectively,  has  been  fully  shown 
and  formulated  in  the  equations  (5)  and  (6)  (252),  and  how 
the  interest  rate  determines  the  amount  of  capital  that  can 
be  employed  advantageously  has  likewise  been  pointed  out 
(158).  The  share  going  to  capital  and  money  combined  is 
equal  to  the  product  of  the  above  amount  of  capital  mul- 
tiplied by  the  interest  rate. 

The  share  going  to  labor  as  wages  is  really  determined  at 
the  margin  of  the  employment  of  capital,  namely,  where  all 
capital  goods  needed  are  obtained  through  borrowed  money. 
The  share  going  to  land  as  rent  and  that  going  to  money  as  in- 
terest being  predetermined,  the  amount  going  to  labor  as 
wages  is  the  residual  share  of  the  group's  net  income.  The 
intra-marginal  capitalist  purchases  labor  at  the  same  price 
as  that  which  labor  commands  at  this  margin,  and,  after  pay- 
ing rent  and  wages,  he  retains  as  income  an  amount  equal  to 
the  money  interest  paid  by  the  marginal  capitalist,  and  this 
income  is  capital  interest.  It  would  appear  from  this  that 
capital  interest  is  the  final  residual  share,  but  since  capital 
interest  equals  the  money  interest  paid  by  the  marginal 
capitalist  to  the  lender  of  money,  it  is  really,  like  money  in- 
terest, a  predetermined  share.  Labor  cannot  employ  itself 
without  the  use  of  land  and  cannot  therefore  shirk  the  pay- 
ment of  rent.  Nor  can  it  make  itself  independent  of  the 
charges  for  the  use  of  capital  so  long  as  the  means  of  exchange 
command  an  item  of  pure  interest.  Labor  must  therefore 
take  what  is  left  after  rent  and  interest  are  paid. 

Our  investigation  has  also  laid  bare  the  source  and  the 
nature  of  the  peculiar  power  which  money  possesses  under 
existing  conditions.  Under  these  conditions  money  possesses 
two  distinct  capacities,  only  one  of  which  is  inherent  and 
essential,  while  the  other  is  extraneous  and  unessential.  Each 
of  these  faculties  is  due  to  a  separate  and  independent  cause. 

In  the  first  place,  money  has  capacity  as  a  medium  of 
exchange.  This  faculty  is  imparted  to  it  by  the  social  com- 
pact through  which  coined  gold  and  certain  credits  acquire 
current  acceptability  in  the  market.    Through  the  use  of  this 


267]  MONOPOLY  THEORY  OF  INTEREST  361 

capacity  producers  are  enabled  to  specialize  their  work  and  to 
employ  the  best  methods  of  production.  But  in  this  capacity 
money  merely  facilitates  exchanges,  and  since  products  do 
not  increase  in  value  merely  through  being  exchanged,  the 
use  of  money  as  a  medium  of  exchange  cannot  afford  either 
profit  or  revenue  (134).  In  this  capacity,  therefore,  money 
cannot  be  classed  as  capital  (129). 

But,  as  stated  above,  money  possesses  another  capacity, 
namely  that  of  commanding  a  revenue  when  loaned.  It  is 
only  through  lending  that  money  develops  a  power  character- 
istic of  capital.  This  power  becomes  attached  to  money 
through  the  operation  of  legal  hindrances  to  the  free  use  of 
secured  credit  as  a  medium  of  exchange  and  is  accordingly 
extraneous  to  the  essential  function  of  money,  being  imparted 
to  it  through  the  operation  of  an  impersonal  monopoly  (259- 
261). 

We  must,  however,  avoid  the  error  of  charging  these  con- 
ditions to  machinations  of  any  special  class  of  the  community. 
Although  we  have  found  that  interest  is  not  really  earned 
by  the  owners  of  either  money  or  capital,  these  latter  cannot 
be  justly  accused  of  acquiring  it  by  nefarious  or  by  coercive 
means.  They  are  no  more  responsible  for  the  existing  con- 
ditions than  the  victims  of  the  system  (336). 

It  may  be  in  order  to  reiterate  that  it  is  only  the  unearned 
portion  of  gross  interest  which  is  here  in  question.  That 
portion  of  the  current  interest  which  compensates  the  lender 
for  personal  services  and  covers  the  risk  entailed  is,  of  course, 
altogether  reasonable  and  just.  What  we  have  yet  to  learn  is 
how  money  can  be  deprived  of  its  present  power  to  command 
a  return  exceeding  the  value  of  the  services  rendered  by  the 
lender.  This  cannot  be  done  by  legal  limitation  of  the  rate 
of  interest,  as  is  abundantly  shown  by  experience.  But  it  can 
be  done  by  doing  away  with  the  legal  limitation  of  the  use 
of  credit  as  a  medium  of  exchange  which  prevents  the  supply 
of  money  from  meeting  the  demand.  A  practicable  method 
to  this  end  will  be  elaborated  in  a  later  chapter. 


Hi 


CHAPTER  XV 

BUSINESS  STAGNATION 

268.  Involuntary  Idleness. — As  stated  at  the  beginning, 
the  present  inquiry  was  started  for  the  purpose  of  discovering, 
if  possible,  the  cause  or  causes  of  financial  crises  and  of  the 
recurring  periods  of  business  stagnation.  In  the  light  of  our 
preceding  investigation  this  question  finds  a  conclusive 
answer.  A  few  additional  deductions  from  the  data  at  hand 
will  bring  us  to  an  understanding  of  why  it  is  that  the  proc- 
esses of  production  and  exchange  are  subject  to  periodical  dis- 
turbances, and  why  it  is  that  in  times  of  business  stagnation 
the  pressing  demand  by  unemployed  workers  for  the  means 
of  livelihood  is  not  supplied  in  spite  of  their  readiness  to  give 
their  labor  in  exchange.  This  labor  could  collectively  produce 
the  very  things  which  the  idle  workers  need,  yet,  through  some 
cause  they  seek  employment  in  vain,  while  others  remain  but 
partially  employed.  This  condition  cannot  be  ascribed  to  any 
lack  of  natural  resources,  for  there  is  land  in  plenty  from 
which  to  obtain  the  raw  products  that  need  only  be  worked 
into  the  things  required.  It  cannot  be  attributed  to  a  scarcity 
of  industrial  and  commercial  facilities,  for  in  times  of  busi- 
ness depression  the  means  of  production  and  transportation 
are  in  part  idle,  and  their  owners  are  constantly  on  the  look- 
out to  put  them  to  use.  Nor  can  it  be  said  that  energy  and 
enterprise  are  wanting,  for  everywhere  both  employers  and 
workmen  are  anxious  to  resume  work.  It  is  manifest  that 
these  conditions  are  not  inherent  in  the  nature  of  things, 
but  that  they  result  from  some  existing  defects  in  the  existing 
economic  system  which  cannot  but  be  susceptible  of  correction 
in  some  practicable  way. 

269.  Excess  of  Supply  Over  Demand. — The  most  con- 
spicuous feature  of  business  stagnation  is  the  excess  of  the 
supply  of  labor  and  its  products  over  the  effective  demand 
for  them.    This  would  appear  to  conflict  with  the  well  recog- 

362 


2701  BUSINESS  STAGNATION  363 

nized  fact  that  the  supply  of  any  one  thing  in  the  market 
constitutes  a  demand  for  some  other  thing  of  equal  value,  and 
that  for  this  reason  the  total  of  all  supply  and  the  total  of 
all  demand  are  always  equal  (34).  But  it  must  be  remem- 
bered that  this  is  true  only  of  the  sum  total  of  supply  and 
demand,  and  is  not  necessarily  true  as  regards  the  supply  and 
demand  of  particular  commodities  or  services.  It  simply 
means  that  if  at  any  time  there  is  an  excess  of  the  supply  of 
some  goods  or  services  in  the  market,  this  inequality  is  neces- 
sarily balanced  by  an  equal  deficiency  of  the  supply  in  some 
other  direction. 

But  even  this  does  not  seem  to  be  borne  out  in  the  actual 
business  world.  It  is  the  universal  experience  that  there  are 
times  when  all  kinds  of  goods  and  services  are  offered  in  the 
market  in  excess  of  the  effective  demand.  At  such  times  there 
are  workers  in  practically  every  branch  of  industry  who  seek 
employment  in  vain  and  producers  in  practically  every  line 
whose  goods  accumulate  in  the  market  because  of  a  general 
lack  of  effective  demand. 

If  it  is  indeed  a  fact  that  total  supply  and  total  demand 
are  necessarily  equal,  it  must  be  possible  to  point  out  some 
product  of  which  the  supply  is  less  than  the  demand  during 
those  periods  in  which  the  supply  of  both  labor  and  mer- 
chandise generally  is  greater  than  the  demand. 

270.  Insufficient  Supply  of  Money  the  Cause. — Since 
practically  all  exchanges  are  mediated  through  money,  each 
offer  of  goods  or  services  primarily  constitutes  a  demand  for 
money,  and  it  follows  that  if  the  supply  of  this  medium  is 
deficient,  the  demand  for  things  and  services  offered  for 
money  is  correspondingly  deficient.  The  general  oversupply 
of  things  and  services  offered  for  exchange  can  he  accounted 
for  only  by  an  equal  tinder-supply  of  the  medium  of  exchange. 
In  our  preceding  investigation  we  have  found  that  there  is 
actually  an  under-supply  of  the  medium  of  exchange  (238), 
and  that  this  condition  imparts  to  both  money  and  capital 
goods  the  power  to  command  an  unearned  income.  The 
arbitrary  control  of  the  volume  of  currency,  accordingly,  is 


364  RESTRAINTS  ON  INDUSTRY  [270 

not  only  the  cause  of  the  predatory  power  of  wealth,  but  also 
the  cause  of  industrial  stagflation. 

In  the  equation  of  monetary  circulation  (119) 

the  letter  K  represents  the  yearly  traffic  of  goods  and  services, 
and  the  product  K  X  P  is  the  same  traffic  expressed  in  terms 
of  dollars.  The  monetary  flow  V  X  R  measures  the  volume  of 
money  payments.  If,  then,  by  an  undue  limitation  of  the 
volume  V  this  flow  is  constrained,  the  volume  of  exchanges  is 
thereby  correspondingly  restricted.  This  demonstrates  what 
has  been  stated  above,  that  stagnation  of  'business  with  its 
coincident  lack  of  employment  is  due  to  the  inadequacy  of  the 
medium  of  exchange  (121,  262). 

This  explanation  of  the  lack  of  employment  has  often  been 
advanced,  but  has  been  persistently  rejected  by  many  econo- 
mists, principally  for  the  following  reason. 

It  is  known  that  periods  of  business  stagnation  alternate 
with  periods  of  business  activity,  though  the  volume  of  money 
is  practically  the  same  during  both  periods.  If  it  is  sufficient 
during  prosperous  periods,  why  should  it  not  also  suffice  dur- 
ing times  when  business  is  depressed  ?  Indeed,  during  periods 
of  protracted  business  stagnation  money  accumulates  in  banks 
and  is  offered  for  loan  at  reduced  rates  of  interest.  This 
fact  is  generally  held  to  indicate  that  we  are  actually  suffer- 
ing from  a  plethora  of  money.  Let  us  examine  how  far  this 
argument  is  valid. 

When  a  steady  wind  blows  against  a  tree,  it  alternately 
bends  down  and  rises  up  again,  swaying  to  and  fro.  "When 
bent  down  as  far  as  it  will  go,  it  remains  for  a  moment  almost 
stationary  before  it  rises  again,  and  after  assuming  its  upright 
position,  it  remains  practically  upright  for  a  second  or  so 
before  bending  down  again. 

But  who  would  construe  these  facts  as  demonstrating  that 
the  swaying  of  the  tree  cannot  be  caused  by  the  wind,  on  the 
ground  that  if  the  tree  can  maintain  an  upright  position  for 
a  moment  in  the  face  of  the  wind,  this  wind  cannot  be  re- 
garded as  the  cause  of  the  bent  position  of  the  tree  at  another 


270]  BUSINESS  STAGNATION  365 

moment.  Yet,  this  is  in  substance  the  contention  of  those  who 
insist  that  the  acemnulation  in  banks  during  periods  of  busi- 
ness stagnation  is  proof  that  there  is  not  only  an  abundance, 
but  even  a  plethora  of  money,  and  that  accordingly  the  re- 
curring periods  of  business  stagnation  cannot  be  due  to  an 
insufficient  voliune  of  currency.  As  a  matter  of  fact,  the 
obstructions  placed  in  the  way  of  freedom  of  exchange  by  our 
currency  laws  are  the  cause  not  only  of  a  holding  back  of  the 
processes  of  production  and  exchange,  but  also  of  the  alterna- 
tions of  periods  of  depression  with  periods  of  prosperity,  just 
as  the  action  of  the  wind  really  causes  the  bending  and 
alternate  swaying  of  the  tree. 

If  the  tree  were  absolutely  rigid,  if  the  element  of  elasticity 
were  totally  absent,  the  wind  could  not  possibly  sway  it.  It 
would  resist  the  wind  until  the  force  increases  to  the  point  of 
breaking.  Some  reactive  force  like  that  of  elasticity  which 
increases  as  the  tree  is  bent,  or  like  that  of  gravity  which  acts 
on  an  increasing  leverage  as  a  pendulum  swings  from  its 
central  position,  must  be  present  in  order  to  bring  about 
alternation  of  movement. 

That  such  a  factor  is  present  in  the  existing  conditions  of 
commerce  and  industry  can  easily  be  shown.  The  element  of 
credit  is  to  business  conditions  what  elasticity  is  to  the  tree. 
It  is  through  the  system  of  credit  that  debts  accumulate  and 
exert  an  increasing  pressure  upon  business  conditions 
generally. 

A  community  can  be  imagined  in  which  commercial  credit 
is  unknown.  Its  money  would  consist  of  a  standard  com- 
modity exclusively;  every  purchase  would  immediately  be 
settled  by  the  payment  of  money;  there  would  be  no  debts, 
no  lending  of  money.  If  under  these  conditions  the  volume 
of  money  were  inadequate  to  mediate  all  those  exchanges  which 
would  be  required  in  order  to  keep  all  workers  fully  employed, 
the  industrial  flow  would  correspondingly  be  restricted.  An 
unvarying  amount  of  unemployed  labor,  a  practically  uniform 
degree  of  "lack  of  Avork,"  would  prevail  in  this  community. 
The  extremes  of  prosperous  and  dull  times  would  never  be 


366  RESTRAINTS  ON  INDUSTRY  [270 

observed.      Crises    would    never    occur.      The    equation    of 
monetary  circulation 

KXP^VXR 

would  be  constantly  satisfied. 

But  credit,  as  a  factor  of  our  commercial  system,  permits  a 
departure  from  this  uniform  state  of  things.  The  indl^strial  flow 
K  X,  P  may  for  a  time  exceed  the  compensating  monetary  flow 
V  X  R,  and  during  this  time  the  inadequacy  of  the  volume  V 
cannot  manifest  itself  as  an  obstruction.  Since  the  delivery 
of  goods  is  not  at  once  followed  by  payment,  the  above  equa- 
tion is  not  applicable  to  definite  periods  (120)  and  should  be 
modified. 

If  B  is  the  sum  of  business  debts  and  dB  is  the  differential, 
that  is,  the  increase  of  these  debts  within  a  given  period,'"' 
the  equation  should  be  written  (245,  272)  : 

KXP=VXR-}-dB. 

"While  business  is  prosperous  and  the  industrial  flow  K  XP 
exceeds  the  monetary  flow  V  X  R,  credit  is  freely  extended 
and  business  debts  gradually  increase.  But  ere  long  pay- 
ments are  more  and  more  postponed,  collections  become  slower 
and  slower,  and  increasingly  long  credits  are  demanded  on 
every  side  (273).  The  monetary  flow  is  inadequate  to  fully 
balance  the  industrial  flow  (291),  but  for  a  time  the  inevitable 
result  is  staved  off. 

So,  too,  those  currents  which  make  up  the  barren  circula- 
tion of  money  do  not  balance.  As  long  as  the  flow  I,  Fig.  25, 
exceeds  the  difference  E  —  S,a  reactive  force,  like  that  of  the 
elastic  force  of  the  bending  tree,  will  develop  in  the  form  of 
increasing  money  debts,  and  since  these  debts  cannot  in- 
definitely increase,  a  reaction  must  finally  set  in.  The  period 
of  increasing  debt  and  the  period  of  inevitable  reaction 
alternate  like  the  oscillations  of  the  tree,  these  changes  taking 
the  form  of  recurring  business  fluctuations.  But  let  us  look 
more  closely  into  the  details  of  this  process. 

°'  If  business  debts  should  decrease  during  any  period,  the  differ- 
ential dB  becomes,  of  course,  a  negative  quantity. 


271. 27£J  BUSINESS  STAGNATION  367 

271.  The  Cycle  of  Industrial  Activity.^ °*' — In  our  con- 
clusions regarding  the  law  of  interest  (251)  we  limited  our 
considerations  principally  to  long  periods  of  time,  taking  no 
account  of  fluctuations  from  the  average.  We  reasoned  from 
the  formula: 

(4)  I  =  E  —  S, 

which  is  wholly  valid  only  with  reference  to  average  con- 
ditions. But  when  we  come  to  study  periodic  changes,  we 
cannot  ignore  the  quantities  dD  and  dV  and  must  therefore 
have  recourse  to  the  strictly  correct  formula : 

(3)  I  =  E  —  S-{-dD  —  dV. 

The  differential  quantities  dD  and  dV  nave  a  distinct 
significance  in  the  cycle  of  industrial  activity.  In  this  cycle 
there  can  be  distinguished  four  periods,  according  as  the 
predominating  features  are  successively  (1)  a  positive  dD, 
(2)  a  negative  dV,  (3)  a  negative  dD,  and  (4)  a  positive  dV; 
or,  to  put  it  in  ordinary  phrase,  first,  an  increasing  volume  of 
of  loan  debts,  attended,  as  we  have  seen  before,  by  a  similar 
increase  of  business  debts ;  second,  a  decreasing  volume  of 
active  funds ;  third,  a  decreasing  volume  of  debts ;  and  fourth, 
an  increasing  volume  of  active  funds.  In  the  first  and  second 
periods  the  flow  /  exceeds  the  difference  E  —  S  ot  the  prepara- 
tory currents,  in  other  words,  the  total  net  interest  received 
by  the  financial  class  is  more  than  their  net  expenditures.  In 
the  third  and  fourth  periods  the  reverse  is  the  case.  As  a 
rule  these  periods  merge  gradually  into  each  other.  Only 
exceptionally  can  a  rapid  change  from  one  to  the  other  be 
observed.  In  Fig.  26  in  which  the  line  DD  represents  the 
varying  volume  of  loan  debts,  and  the  line  VV  the  varying 
volume  of  money  in  actual  use,  this  cycle  is  graphically 
depicted. 

272.  First  Period. — In  times  of  industrial  activity,  when 
business  is  "brisk,"  all  industi'ies  are  fully  employed  and 
goods  are  sold  as  rapidly  as  they  can  be  made.    The  industrial 

"*  See  footnote  No.  94,  paragraph  245. 


368  RESTRAINTS  ON  INDUSTRY  [272 

flow  is  at  its  height.  Though  all  available  money  is  drawn  into 
circulation  and  the  rapidity  of  circulation  is  greater  than  at 
any  other  time,  yet  the  monetary  flow  V  X  E  does  not  keep 
pace  with  the  industrial  flow  KXP  (119),  and  the  active 
demand  for  money  finds  expression  in  a  high  rate  of  interest. 
In  the  above  equation  (270)  the  differential  dB  is  accord- 
ingly a  positive  quantity,  which  means  that  business  debts  are 
on  the  increase.  But  just  as  the  resistance  of  the  swaying 
tree  against  the  wind,  when  it  begins  an  oscillation  downward, 
is  at  first  but  slight,  so  is  the  effect  of  accumulating  business 
debts  upon  industry  and  commerce  at  first  but  imperceptible. 

Meanwhile  debts  for  money  loans  are  also  increasing,  and 
interest  payments  likewise.  The  current  /  now  exceeds  the 
difference  E  —  S  (251),  and  therefore  the  balance  of  the 
three  currents  I,  E  and  S  of  Fig.  25  is  in  favor  of  the  passive 
funds.  This  excess  is  returned  into  the  field  of  active  funds 
through  the  loan  channel  L,  hence  that  current  exceeds  the 
sum  of  the  currents  P  and  R.  The  volume  V  is  not  reduced, 
despite  the  excess  of  I  over  E  —  S,  but  this  excess,  being 
added  to  the  current  L,  causes  an  increase  of  the  volume  of 
loan  debts,  an  increase  of  the  indebtedness  of  the  business 
world  to  the  financial  world. 

At  this  stage  three  factors  come  into  play  which  hasten 
the  coming  reaction.  First,  the  prices  of  both  goods  and  labor 
go  up,  and  the  corresponding  rise  of  the  price  level  P  swells 
the  excess  of  the  flow  K  X  P  over  the  flow  V  X  R-  At  this 
higher  price  level  the  capa^city  of  money  to  perform  its  work 
as  a  medium  of  exchange  is  reduced,  hence  the  same  amount 
of  money  can  no  longer  compass  the  same  volume  of  traffic. 
Second,  through  steady  employment  wage-earners  are  enabled 
to  lay  aside  more  of  their  earnings  than  before.  An  increas- 
ing fraction  of  the  total  money  is  being  withheld  from  circu- 
lation, and  the  current  8,  Fig,  25,  is  increased.  Third,  bor- 
rowers of  money  reach  the  limit  of  their  credit,  and  the  pay- 
ments of  business  debts  become  increasingly  deferred.  The 
excess  of  I  over  E  —  S  is  no  longer  fully  restored  to  circula- 
tion, hence  the  volume  of  active  funds  begins  to  shrink.  Thus 
the  first  period  of  the  cycle,  characterized  by  an  increasing 


273]  BUSINESS  STAGNATION  369 

indebtedness,  a  practically  stationary  vomme  of  active  funds 
and  an  excess  of  the  current  I  over  the  difference  E  —  S, 
gradually  merges  into  the  second  period,  characterized  by  a 
steady  diminution  of  the  volume  of  active  funds. 

273.  Second  Period. — The  difficulty  experienced  in  col- 
lecting outstanding  accounts  now  increases,  as  the  monetary 
flow  lags  more  and  more  behind  the  industrial  flow  of  goods 
(270).  Payments  are  received  more  slowly  than  counted 
upon;  the  risks  of  selling  on  credit  become  more  and  more 
marked.  Lack  of  funds  on  the  one  hand,  and  considerations 
of  safety  on  the  other,  now  compel  retrenclunent.  Prepara- 
tions made  for  a  continuous  and  increasing  run  of  business 
activity  now  become  unavailing,  and  business  failures  in- 
crease in  number.  Money  has  become  "tight"  and  is  held 
back  for  possible  emergencies.  Hoarding  becomes  a  common 
practice  (282,  303),  and  less  money  is  brought  to  the  banks, 
hence  bank  reserves  diminish.  The  dearth  of  money  becomes 
acute,  and  the  unusual  demand  for  gold,  the  only  medium 
through  which  the  shrinking  bank  reserves  can  be  replenished, 
causes  its  value  to  rise,  and  in  consequence  prices  tend  to 
go  down  (345).  Since  banks  are  constrained  to  curtail  loans 
and  to  call  in  or  reduce  those  already  granted  (277),  the 
volume  of  that  part  of  the  medium  of  exchange  which  consists 
of  bank  credit  is  contracted  (281).  A  financial  panic  is 
imminent.  The  swaying  tree  has  bent  before  the  wind  to  its 
lowest  position  and  its  resistance  is  strained  to  the  utmost. 

At  this  stage  of  the  cycle  the  financial  conditions  in  the 
United  States  present  a  feature  which,  by  reason  of  the  ex- 
tensive use  of  bank  credit  as  a  means  of  payment,  is  peculiar 
to  this  country.  Over  two-thirds  of  the  available  means  of 
exchange  normally  consist  of  bank  credit  which  has  but  a 
limited  range  of  circulation.  Only  about  one-third,  or  even 
less,  of  the  means  of  payment  consists  of  currency  which  is 
adapted  to  pass  from  hand  to  hand,  and  the  money  which  is 
withheld  from  the  banks  by  hoarding  is  taken  exclusively 
from  this  latter  portion.  The  banks  receive  too  little  cur- 
rency to  meet  their  requirements.  They  are  therefore  unable 
to  furnish  currency  as  it  may  be  called  for  by  depositors, 
24 


370  RESTRAINTS  ON  INDUSTRY  [274 

and  these  are  accordingly  unable  to  make  payments  requiring 
currency.  At  such  a  juncture  even  wages  have  largely  to  be 
paid  by  check.  To  meet  the  emergency  as  it  develops  in  the 
great  centres  of  exchange,  recourse  is  taken  to  extraordinary- 
means  of  filling  the  gap  in  the  means  of  payment,  by  creating 
the  medium  of  exchange  known  as  "clearing  house  certifi- 
cates." In  countries  where  payment  by  check  is  not  so 
prevalent  as  in  the  United  States,  financial  crises  do  not  take 
the  acute  form  of  a  marked  disappearance  of  currency  from 
circulation. 

The  distinctive  features  of  this  second  period  of  the  cycle 
are  a  practically  stationary  volume  of  loan  debts,  since  bank 
reserves  are  at  a  minimum,  and  a  diminishing  volume  of 
active  funds,  resulting  from  an  overbalance  of  the  currents 
that  flow  out  from  the  active  into  the  passive  field,  accent- 
uated in  the  early  stages  of  the  period  by  a  general 
tendency  to  hold  on  to  money  in  apprehension  of  its  increas- 
ing scarcity.  The  quantity  dD  is  practically  nil,  dV  is 
negative  and  /  still  exceeds  E  —  8. 

274.  Third  Period. — Owing  to  the  lack  of  money  in  the 
active  field  and  the  consequent  stagnation  in  business,  many 
debtors  are  unable  to  meet  their  obligations,  and  the  third 
period  is  ushered  in.  Business  men  who  can  do  so  pay  off 
at  least  part  of  their  loan  debts,  since  a  smaller  working 
capital  suffices  for  the  reduced  volume  of  business.  But  the 
sum  total  of  collectible  debts  is  furthermore  reduced  by  reason 
of  business  failures  which  at  this  period  become  increasingly 
numerous,  and  since  for  this  reason  a  greater  portion  of  the 
gross  interest  goes  to  cover  losses,  that  portion  of  the  re- 
mainder which  constitutes  pure  interest  is  materially  reduced 
(256).  This  is  the  typical  period  of  business  depression  with 
its  widespread  business  disasters  and  the  prevailing  stagnation 
of  industry  and  commerce.  It  has  been  currently  but  errone- 
ously assumed  that  these  conditions  are  but  a  manifestation 
of  the  process  of  "weeding  out  financially  weak  business  con- 
cerns" and  putting  a  stop  to  "heedless  overproduction  of 
things. ' ' 


>/ 


£75]  BUSINESS  STAGNATION  371 

The  economic  law  expressed  by  the  formula: 

I  =  E  —  S, 

which  we  have  found  to  mean  that  the  net  income  /  from 
money  loans  cannot  indefinitely  exceed  the  net  expenditures 
E  —  S  ol  the  lenders  (251)  now  asserts  itself.  The  sum  of 
net  interest  on  loans  falls  below  the  net  expenditures  of  the 
lenders  to  the  extent  to  which  it  formerly  exceeded  the  latter. 
Money  is  now  freelj^  offered  for  loan  on  approved  security  at 
low  rates  of  interest,  but  would-be  borrowers  who  are  already 
deeply  indebted  cannot  give  acceptable  security  for  further 
loans,  and  the  possessors  of  good  security  who  have  but  few 
or  no  debts  have  no  need  to  borrow  for  the  purpose  of  pay- 
ment, and  no  occasion  to  borrow  for  the  purpose  of  increasing 
business  facilities  which  are  already  more  than  adequate  under 
the  existing  conditions.  Money  accumulates  in  hanks,  which 
would  seem  to  indicate  that  it  is  not  needed  in  business.  This 
accumulation  is  often  adduced  as  proving  that  there  is  a 
plethora  of  money,  while  in  reality  it  is  a  natural  and  inevit- 
able result  of  excessive  interest  rates  due  to  the  insufficiency 
of  money. 

The  features  of  this,  the  third  period,  are  a  diminishing 
volume  of  debts,  in  part  due  to  the  many  failures  by  which 
debts  become  invalid  and  must  be  charged  to  loss,  a  small 
volume  of  active  funds,  an  accumulation  of  money  in  banks, 
and  a  low  rate  of  net  interest,  so  low,  indeed,  that  it  is  in- 
sufficient to  cover  the  expenditures  E  of  lenders,  while  the 
current  S  shrinks  to  almost  nothing.  The  current  /  is  now 
less  than  the  difference  E  —  S. 

275.  Fourth  Period. — Finally  the  third  period  of  this 
business  fluctuation  merges  into  the  fourth,  as  the  money 
in  the  active  field  slowly  increases  by  reason  of  the  excess  of 
E  over  /.  The  differential  dV  is  positive,  and  this  leads  to  a 
gradual  recovery.  The  net  income  /  of  lenders  is  still  low, 
principally  for  two  reasons.  In  the  first  place,  most  of  the 
remaining  debts  have  been  renewed  at  a  lower  rate  of  interest 
and,  in  the  second  place,  the  volume  of  indebtedness  is  at  an 
ebb,  while,  at  the  same  time,  business  is  so  dull  that  those 


372  RESTRAINTS  ON  INDUSTRY  [276 

Avho  are  iu  position  to  borrow  money  have  no  inducement  to 
do  so.  By  the  excess  of  the  current  E  over  the  currents  I  and 
S  of  Fig.  25  the  passive  funds  are  finally,  though  slowly, 
restored  to  activity.  It  should  be  remembered  that  the  current 
E  includes  not  only  the  expenditures  of  passive  funds  for 
personal  use,  but  also  their  investment  in  industrial  enter- 
prises (249).  The  money  that  has  accumulated  through  the 
current  I  is  now  being  put  out  in  ''reorganizing"  business  con- 
cerns that  had  become  ' '  embarrassed, ' '  in  starting  anew  enter- 
prises that  had  been  halted  and  in  investments  in  new  under- 
takings. It  is  by  this  process  that  the  ownership  of  all  larger 
industries  is  being  gradually  acquired  by  the  "Napoleons  of 
Finance."  We  shall  hereafter  have  more  to  say  on  this 
feature  of  our  industrial  system  (338). 

In  this  period  the  volume  D  of  debts  is  low  and  prac- 
tically stationar}^  but  the  volume  V  increases,  as  indicated  in 
Fig.  26,  while  the  current  I  remains  less  than  E  —  S. 

276.  Succession  of  Cause  and  Effect. — In  the  foregoing 
presentation  of  the  cycle  of  industrial  activity  we  have  found 
an  explanation  of  all  the  developments  of  the  successive  periods 
by  tracing  their  causal  relations.  The  characteristic  features 
of  each  period  result  from  those  of  the  preceding  one  and 
become  in  their  turn  the  immediate  causes  of  those  of  the 
succeeding  period. 

The  underlying  cause  of  this  succession  of  events  is  me 
need  of  the  business  world  for  a  medium  of  exchange  coming 
in  conflict  with  the  forces  that  constrain  the  supply.  Money 
thereby  obtains  the  power  to  command  pure  interest  which 
gives  preponderancy  to  the  monetary  flow  from  the  active  to 
the  passive  field.  In  the  first  period  the  money  so  withdrawn 
from  circulation  is  restored  to  activity  through  loans,  entailing 
an  increase  of  the  volume  of  loan  debts.  In  the  second  period 
the  volume  of  debts  has  grown  to  a  point  beyond  which  they 
cannot  increase,  and  the  industrial  field  becomes  depleted  of 
money  through  the  interest  flow  being  no  longer  returned 
through  loans.  This  leads  to  the  third  period,  a  time  of  general 
stagnation  of  business,  of  business  failures  (240)  and  of 
reduced  interest  rates.  And  this  is  followed  by  a  reaction 
which  starts  the  fourth  period,  a  time  of  readjustment,  charac- 


277J  BUSINESS  STAGNATION  373 

terized  principally  by  a  gradual  restoration  of  the  locked-up 
currency  to  circulation. 

Cause  and  effect  are  thus  seen  to  follow  in  their  natural 
sequence,  in  a  cycle  of  four  periods.  In  actual  affairs,  to  be 
sure,  the  successive  periods  do  not  follow  each  other  as  rhyth- 
mically as  plotted  in  the  diagram  Fig.  26.  The  ramifications 
of  business  are  such  that  at  times  the  extent  of  fluctuation  is 
less  than  at  others,  the  interval  between  extremes  being  then 
marked  by  minor  disturbances,  just  as  in  a  stormy  sea  the 
depression  between  two  high  waves  is  marked  by  smaller  ones. 

277.  Current    Explanations   of   Business    Stagnation. — 

Various  theories  have  been  advanced  by  writers  on  economics 
and  are  constantly  echoed  by  the  periodical  press,  to  explain 
the  phenomenon  of  business  stagnation.  Financial  crises  are 
usually  attributed  to  causes  within  the  control  of  individuals, 
such  as  reckless  or  even  dishonest  pursuit  of  gain,  to  mis- 
direction of  large  industrial  enterprises,  to  designedly  corner- 
ing the  money  market,  and  so  forth.  Our  investigation  points 
indeed  to  an  enforced  constriction  of  the  currency,  effected, 
however,  not  through  a  scheming  by  financiers  supposed  to 
have  control  of  the  money  market,  but  through  the  operation 
of  our  currency  and  banking  laws.  These  laws  have  per- 
sistently been  framed  in  the  light  of  the  supposition  that  the 
volume  of  the  medium  of  exchange  must  be  guarded  against 
so-called  inflation;  and  the  fear  of  "inflation"  is  born  of  a 
theory  which,  unfortunately,  has  too  long  been  prevalent, 
principally  by  reason  of  the  support  given  to  it  through  incor- 
rect reasoning  by  academic  authorities. 

There  is  a  widespread  disposition  to  blame  ''speculation" 
for  industrial  disturbances,  and  since  this  term  is  largely 
applied  to  transactions  which  are  really  nothing  but  gambling 
and  which  are  therefore  popularly  condemned,  this  explana- 
tion, though  incorrect,  is  apt  to  pass  unchallenged. 

Stock  speculation  has  much  the  same  kind  of  attraction  as 
all  other  forms  of  gambling.  The  prospect  of  gain  by  a  lucky 
venture  is  so  alluring  that  the  chances  of  loss  are  disregarded, 
and  hazards  of  this  nature  are  often  carried  to  a  point  where 
the  gambler  is  finally  engulfed  in  ruin.    But  there  is  no  reason 


374  RESTRAINTS  ON  INDUSTRY  [278 

whatever  why  this  should  lead  to  general  disaster.  No  actual 
wealth  is  either  gained  or  lost  by  the  community  as  a  result 
of  such  ventures.  Some  people  thereby  become  richer,  others 
poorer  (216),  and  since  no  one  can  foresee  the  future,  no  one 
can  have  more  than  a  temporary  advantage  over  others  in  the 
field  of  speculation,  except  where  the  ** insiders"  are  playing 
the  game  with  loaded  dice.  An  industrial  depression  of  a 
general  nature  cannot  result  from  this  cause. 

The  widespread  belief  that  stock  speculation  is  one  of  the 
causes  of  financial  crises  is  strengthened  by  the  fact  that  such 
crises  are  invariably  attended  by  a  general  fall  in  the  value 
of  stocks.  But  this  can  readily  be  explained.  When  in  the 
second  period  of  the  cycle  of  business  fluctuation  (273)  the 
banks  are  obliged  to  call  in  loans,  those  debtors  who  possess 
stocks  or  bonds  find  these  assets  most  easily  marketable  for 
paying  off  their  loans,  and  such  certificates  of  value  being  put 
upon  the  market  in  unusual  amounts,  their  value  naturally 
declines.  A  break  in  the  value  of  stocks  is  therefore  often  a 
first  indication,  but  not  a  cause  of  the  coming  storm,  the  real 
cause  being  the  accumulated  overwhelming  indebtedness  of 
the  business  world. 

278.  Over-trading. — The  impulse  to  speculate  finds  ex- 
pression in  various  ways.  Instead  of  gambling  in  stocks, 
business  men  may,  in  a  purely  speculative  spirit,  buy  goods  in 
expectation  of  a  rise  in  the  market.  Crises  have  often  been 
ascribed  to  the  failure  of  such  expectations,  as  may  be  seen 
from  the  following  condensed  abstract  from  John  Stuart  Mill : 

When  there  is  a  general  impression  that  the  price  of  some 
commodity  is  likely  to  rise,  there  is  a  disposition  among  dealers 
to  increase  their  stock  of  goods  in  order  to  profit  by  the  expected 
rise.  This  disposition  tends  in  itself  to  produce  a  rise  of  price. 
Other  speculators  are  attracted  who,  by  further  purchases,  pro- 
duce a  further  advance.  After  a  time  the  price  ceases  to  rise 
and  the  dealers,  thinking  it  time  to  realize  their  gains,  are 
anxious  to  sell.  The  price  begins  to  decline,  the  dealers  rush 
into  the  market  to  avoid  a  still  greater  loss,  and  finding  but 
few  purchasers  willing  to  buy  in  a  falling  market,  the  price 
falls  much  more  suddenly  than  it  rose. 

In  a  community  in  which  credit  was  unknown,  this  will  be 


278]  BUSINESS  STAGNATION  375 

confined  to  one  or  a  few  commodities.  But  when  people  go 
into  the  market  and  piirchase  with  the  money  they  hope  to 
receive  hereafter,  this  form  of  speculation  may  be  going  on  in 
all  commodities  at  once.  All  prices  will  then  rise  enormously 
by  the  mere  extension  of  purchases  on  book  credits.  After  a 
time  those  who  had  bought  would  wish  to  sell  and  prices  would 
collapse,  thus  bringing  about  a  commercial  crisis.^"^ 

This  argument  is  founded  on  unwarranted  assumptions. 
A  rising  or  falling  of  market  values  cannot  as  a  rule  be  fore- 
seen. But  even  if  there  are  reasons  to  expect  the  price  of 
some  goods  to  rise,  and  these  reasons  are  generally  known, 
those  who  have  such  goods  for  sale  will  not  sell  unless  they 
get  a  price  that  includes  the  expected  increase.  Hence  a  gen- 
eral rush  to  buy  in  a  rising  market  will  at  once  be  checked  by 
an  increase  of  the  price.  To  be  sure,  it  may  happen  that  some 
individuals  gain  insight  into  causes  that  may  affect  prices  be- 
fore others  do,  and  may  use  this  insight  to  reap  speculative 
gains,  but  since,  in  the  nature  of  things,  these  happenings  are 
but  of  comparatively  rare  occurrence  and  may  be  on  the  side 
of  either  buyer  or  seller,  their  influence  on  general  business 
conditions  is  negligible. 

But  even  if  a  rise  in  price  had  induced  dealers  to  lay  in  a 
large  stock  of  the  goods,  there  is  no  reason  to  assume  that  the 
first  manifestation  of  a  decline  in  prices  would  cause  a  rush 
to  sell,  such*as  described  by  Mill.  Prices  in  general  are  known 
to  be  subject  to  irregular  minor  fluctuations  (60),  hence  a 
turn  in  the  movement  of  prices  is  never  accepted  as  certain 
indication  of  a  continued  advance  or  decline.  The  conclusion 
that  a  first  indication  of  a  fall  in  prices  will  frighten  the 
holders  of  the  goods  into  selling  and  will  keep  people  from 
buying,  thus  causing  a  collapse,  does  not  agree  with  observed 
conditions.  In  point  of  fact,  a  demoralized  market  is  one  of 
the  incidents  and  not  the  cause  of  commercial  crises. 

Although  a  rising  or  falling  of  market  prices  can  be  fore- 
seen only  in  sporadic  instances,  theories  have  nevertheless  been 
elaborated  regarding  the  effect  of  a  rising  or  a  falling  market 
on  the  state  of  business,  on  the  current  rate  of  interest,  on  the 

'"C/.  Mill,  II,  pp.  07  ff. 


376  RESTRAINTS  ON  INDUSTRY  [279 

stock  market  and  on  other  economic  conditions.  Theories  of 
this  kind  are  applicable  to  such  cases  only  where  a  continued 
rise  or  fall  can  be  foreseen  with  tolerable  certainty,  as  for 
example  to  land  values.  How  the  expected  annual  increment 
affects  the  value  of  land  has  been  fully  discussed  (183)  and 
will  be  the  subject  of  further  consideration  (327-329).  As  a 
special  exception  to  the  rule  that  an  impending  change  of 
prices  cannot  be  foreseen  may  be  mentioned  the  peculiar  con- 
ditions prevailing  during  the  time  following  the  passage  of 
the  law,  in  1875,  providing  that  specie  payment  should  be 
resumed  on  the  first  of  January,  1879,  During  the  interven- 
ing period  the  value  of  the  dollar  was  predetermined  to  rise 
from  its  depreciated  level  to  parity  with  gold,  and  a  general 
fall  of  prices,  as  measured  in  the  current  dollar,  could  accord- 
ingly be  foretold.  In  this  extraordinary  instance  the  cer- 
tainty of  a  continued  fall  of  prices  was  presumably  responsible 
for  the  prolongation  of  the  business  depression  throughout 
that  period. 

279.  Improvident  Investments. — Somewhat  more  plausi- 
ble than  the  attempted  explanation  just  discussed  is  that 
which  attributes  stagnation  of  industry  to  the  investment  of 
large  amounts  of  capital  in  undertakings,  such  as  the  building 
of  railroads,  which  eventually  turn  out  to  be  unremunerative. 

Similar  in  purport  is  the  proposition  that  crises  result 
from  an  "undue  conversion  of  floating  into  fixed  capital."  ^°- 
This  statement  can  have  reference  only  to  the  investment  of 
money  in  some  form  of  enterprise,  and  since  money,  whether 
in  the  form  of  currency  or  of  bank  credit,  when  invested, 
simply  changes  hands  and  does  not  disappear  from  the  com- 
munity, this  "undue  conversion"  can  only  be  understood  as 
meaning  that  too  much  money  has  been  spent  on  the  pro- 
duction of  fixed  capital,  in  other  words,  that  too  much  effort 
has  been  diverted  from  the  production  of  consumable  things 
to  that  of  means  of  further  production,  and  that  this  ' '  fixed ' ' 
capital  turns  out  to  be  less  remunerative  than  expected. 

In  order  to  account  for  business  stagnation  on  this  ground 
it  would  be  necessary  to  assume  that  the  extent  of  ill-directed 

^"'Cf.  Walker,  p.  473;  MacLeod,  I,  p.  214;  ct  al. 


280]  BUSINESS  STAGNATION  377 

investments  fluctuates  in  more  or  less  regularly  successive 
periods.  But  even  conceding  this  assumption,  the  suggested 
explanation  would  not  account  for  the  phenomenon.  Even 
though  expectations  that  the  products  or  services  to  be 
rendered  through  the  investments  would  find  a  profitable 
market  are  not  realized;  even  though  the  capital  so  "fixed" 
proves  unremunerative  or  a  total  loss ;  why  should  this  cause 
a  general  stagnation  of  business  and  a  paralysis  of  enterprise  ? 
The  owners  of  the  capital  that  has  been  misapplied  have 
simply  lost  a  part  or  the  whole  of  it  and  are  that  much  poorer 
for  their  venture.  To  some  extent  this  loss  may  spread  beyond 
the  immediate  losers  and  may  be  shifted  upon  others.  But  all 
this  affords  no  reason  why  production  and  exchange  in  general 
should  be  arrested  in  their  course.  The  fact  that  some  energy 
has  been  wasted  is  no  cause  for  the  paralysis  of  energy  in 
general.  It  is  manifest  that  this  affords  no  explanation  for 
business  depressions. 

280.  Undue  Expansion  of  Credit. — An  approach  to  the 
true  explanation  of  commercial  crises  is  the  theory  which 
attributes  these  disturbances  to  an  undue  expansion  of  credit. 
It  is  accepted  by  many  writers  on  the  subject  and  is  formulated 
by  Perry  as  follows : 

The  cause  of  commercial  crises  is,  in  general,  an  undue  expansion 
of  credit;  or,  to  use  an  equivalent  expression,  a  disproportion  between 
the  amount  of  debts  and  the  available  capital  in  the  loan-market,  or 
elsewhere,  to  meet  those  debts."" 

But  this  explanation  is  vague.  In  order  distinctly  to  ex- 
press the  condition,  the  statement  should  read  that  there  is  a 
disproportion  between  the  amount  of  debts  and  the  available 
means  of  payment  to  meet  these  debts.  Where  Perry  fails,  as 
do  all  others  of  his  school,  is  to  explain  how  this  "undue  ex- 
pansion of  credit"  comes  about,  for  it  is  in  this  direction  that 
the  real  cause  of  commercial  crises  is  to  be  looked  for.  The 
fact  is  that  bank  currency  and  bank  credit,  making  up  to- 
gether the  indispensable  medium  of  commercial  exchange,  are 
put  into  circulation  almost  entirely  through  the  process  of 
lending,  and  so  long  as  the  borrower  must  pay  interest  at  a 

">"  Perry,  p.  334. 


378  RESTRAINTS  ON  INDUSTRY  [28i,  282 

rate  which  includes  a  toll  in  addition  to  due  compensation  for 
the  work  and  the  risk  of  the  lender,  the  debts  which  are  con- 
tracted in  the  process  of  issuing  currency  and  bank  credit, 
namely  the  debts  of  the  industrial  to  the  financial  class,  must 
constantly  increase,  which  means  that  the  debtors  as  a  class 
are  thereby  compelled  to  "an  undue  expansion  of  credit"  to 
such  an  extent  as  must  inevitably  result  in  an  overwhelming 
"disproportion  between  the  amount  of  debts  and  the  available 
'capital'  "  with  which  to  pay  them  (255). 

281.  Loss  of  Confidence, — Another  widely  accepted  ex- 
planation of  business  depressions  is  that  which  attributes  them 
to  a  general  loss  of  co7ifidence.  Loss  of  confidence  in  what? 
Evidently  in  the  ability  of  debtors  to  pay  their  debts  or  in  the 
likelihood  of  business  continuing  to  pay.  But  why  this  loss  of 
confidence?  Evidently  because  debts  have  grown,  pajnnents 
are  put  off  and  orders  are  getting  less.  The  bare  statement  that 
confidence  has  been  lost  is  not  an  explanation,  inasmuch  as 
the  reason  why  confidence  has  been  lost  remains  to  be  explained. 

Quite  often  the  explanation  is  sought  in  a  general  shrink- 
age of  credit.  What  credit?  The  wealth  in  existence,  the 
veiy  basis  of  credit,  has  not  shrunken,  but,  on  the  contrary, 
has  been  steadily  increasing  during  the  period  of  prosperity 
preceding  a  commercial  crisis,  and  is  at  a  maximum  at  that 
very  juncture.  The  phrase  is  obviously  meaningless,  unless 
"credit"  is  to  be  understood  in  the  sense  of  monetized  credit, 
in  other  words,  money.  What  really  takes  place  and  is 
erroneously  regarded  as  a  "shrinkage  of  credit"  is,  in  the 
first  place,  the  growth  of  indebtedness  beyond  the  means  of 
payment  (255),  and,  in  the  second  place,  a  diminution  of  the 
means  of  pajonent  through  a  reduction  of  bank  credit  by  a 
calling  in  of  loans  (273),  in  other  words,  a  reduction  of  the 
extent  to  which  existing  wealth  is  monetized  (104).  This  is 
not  a  shrinkage  of  credit,  but  a  demonetization  of  credits,  and 
this,  in  turn,  is  a  result  of  our  defective  and  ill-considered 
currency  laws. 

282.  Hoarding  of  Money. — Considering  that  commercial 
crises  have  their  primaiy  cause  in  the  inadequacy  of  the 
volume  of  currency,  it  is  not  surprising  that  one  of  the  in- 
cidents of  such  disturbances,  the  hoarding  of  money,  should 


283]  BUSINESS  STAGNATION  379 

be  mistaken  by  many  observers  for  the  cause  of  the  crisis  in- 
stead of  one  of  its  accompaniments.  That  the  hoarding  of 
money  toward  the  close  of  the  second  period  actually  plays 
a  certain  part  in  hastening  the  transition  from  the  second  to 
the  third  period  of  the  cycle  of  business  fluctuation  has  been 
shown  above  (273). 

When  we  consider  that  money,  whether  gold  or  paper,  is 
in  reality  an  evidence  that  the  owner,  when  he  obtained  the 
money,  gave  real  wealth  in  exchange  for  it,  and  by  hoarding 
the  money  allows  this  real  capital  to  be  used  without  himself 
getting  interest  (80),  the  question  immediately  arises,  why 
should  the  hoarding  of  money  be  deprecated,  and  why  is  it 
considered  a  detriment  to  the  community  ? 

It  is  clear  that  a  withdrawal  of  money  from  circulation  can 
be  harmful  to  a  community  only  if  it  causes  such  a  reduction 
of  the  active  funds  as  to  impede  the  processes  of  active  busi- 
ness. And  this  can  come  about  only  through  the  mistaken 
limitations  on  the  issue  of  money  imposed  by  our  currency 
laws. 

By  many  it  is  regarded  desirable  that  the  rich  should 
spend  their  money  freely,  even  though  extravagantly,  in  order 
that  it  be  put  into  circulation  and  so  "make  business.'*  A 
business  system  in  which  extravagant  consumption  of  wealth 
becomes  a  desirable  factor  of  business  activity  is  manifestly 
bad. 

283.  Extravagance. — If  further  proof  were  needed  of  the 
hopeless  confusion  that  has  arisen  in  the  discussion  of  the 
causes  of  business  disturbances  than  those  above  adduced,  it 
would  be  afforded  by  the  divergent  opinions  and  conflicting 
theories  on  the  subject  of  saving  and  spending  money.  It 
happens  very  often  that  those  who  regard  the  extravagant 
spending  of  money  by  the  rich  as  being  beneficial  because 
money  is  thus  brought  into  circulation,  turn  about  to  admonish 
wage  earners  to  save  their  money,  overlooking  the  fact  that 
this  very  saving  would  in  the  same  sense  take  money  out  of 
circulation. 

Extravagance,  profligacy,  intemperance  and  other  vices 
may  indeed  deprive  their  victims  of  the  means  of  support  in 
time  of  need,  but  cannot  r&sult  in  a  condition  of  affairs  in 


380  RESTRAINTS  ON  INDUSTRY  [284 

which  production  and  exchange  are  brought  to  a  standstill  and 
in  which  men  able  and  willing  to  work  seek  for  employment 
in  vain.  On  the  contrary,  it  is  but  too  frequently  true  that 
the  victims  of  business  depression  turn  to  intemperance  and  to 
crime  as  a  result  of  their  inability  to  honestly  gain  their 
livelihood. 

There  is  manifestly  no  better  ground  for  this  explanation 
of  economic  crises  than  for  the  various  other  current  theories 
on  the  subject.  These  superficial  explanations  of  business 
stagnation  may  be  dismissed  from  further  consideration,  in- 
asmuch as  the  real  cause  of  the  trouble  has  already  been 
pointed  out  in  the  course  of  our  inquiry. 

284.  Effect  of  Tariff  on  General  Business  Conditions. — 
The  very  term  "protective"  tariff  reflects  the  widespread 
notion  that  a  high  tax  on  imports  has  the  effect  of  making  it 
possible  to  give  employment  in  the  home  market  to  workmen 
who  otherwise  would  be  left  unemployed  because  of  foreign 
competition.  But  we  have  already  found,  in  the  course  of 
our  inquiry,  that  the  real  cause  of  unemployment  lies  in  our 
irrational  currency  laws,  and  that  competition,  in  and  for 
itself,  cannot  account  for  lack  of  emplojmient. 

It  cannot  be  denied  that  changes  in  tariff  schedules  have 
the  effect  of  disturbing  the  existing  equilibrium  between  the 
trades  affected  on  the  one  hand  and  all  other  trades  on  the 
other;  and,  moreover,  that  they  have  an  influence,  one  way 
or  another,  on  the  cycle  of  business  activity. 

The  high  wages  prevailing  in  this  country  are  usually 
credited  to  high  tariff.  This,  of  course,  can  refer  only  to 
wages  as  measured  in  dollars  and  cents.  It  will  appear  later 
(353)  that  a  tariff  has  also  the  effect  of  keeping  the  general 
price  level  up,  or,  which  is  the  same,  of  keeping  the  purchas- 
ing power  of  money  down.  Hence  such  increase  in  wages  as 
is  due  to  tariff,  while  apparent  in  the  number  of  dollars  and 
cents,  is  only  in  a  minor  degree  an  increase  of  real  wages 
(165).  A  high  tariff  is  therefore  not  as  much  of  a  boon  to 
labor  as  it  would  appear  to  be.  That  it  is  a  partial  palliative 
of  the  ill  effects  of  our  monetary  system  Avill  be  shown  in  the 
last  chapter  (351-353). 


PART  IV 

CONCLUSIONS 


CHAPTER  XVI 

CURRENCY  REFORM 

285.  Essentials  of  a  Sound  Currency. — In  view  of  the 
numerous  disastrous  failures  of  currency  schemes  recorded  in 
history,  any  proposal  for  a  radical  change  in  the  existing 
currency  system  is  generally  regarded  with  distrust.  The 
prevailing  tendency  is  to  "let  well  enough  alone."  This  is 
strengthened  by  the  widespread  acceptance  of  the  voliune 
theory  of  the  value  of  money,  according  to  which  any  change 
in  the  volume  of  money  will  be  balanced  by  an  opposite  change 
in  the  value  of  the  unit,  and  can  only  derange  the  scale  of 
prices,  resulting  in  more  harm  than  good  (239).  For  this 
reason  changes  in  the  laws  regulating  the  currency  have  been 
made  only  under  the  stress  of  urgent  necessity,  and  generally 
against  much  opposition. 

But  there  is  ample  reason,  as  we  have  seen  in  the  course  of 
this  inquiry,  for  a  thoroughgoing  reform,  looking  to  a  ma- 
terial increase  in  the  volume  of  money.  "What  is  required  is 
a  medium  of  exchange  that  will  be  ample  in  quantity  for  all 
emergencies,  and  sound  in  quality  under  all  conditions.  "We 
have  therefore  to  find,  if  possible,  a  practicable  way  of  meet- 
ing these  requirements.  The  faults  of  the  various  currency 
systems  which  have  proved  defective  can  be  avoided  by  bear- 
ing constantly  in  mind  that  every  piece  of  money  is  essentially 
a  credit  instrument,  an  acknowledgment  of  debt,  accepted  in 
the  market  as  a  medium  of  exchange,  and  that  its  value 
depends  solely  on  the  value  of  the  credit  on  which  it  is  based. 

An  indispensable  requisite  of  money  is  therefore  the  sub- 
stantial security  on  which  it  is  ba.sed,  the  wealth  which  is  the 
foundation  of  the  credit  which  money  represents,  A  further 
requisite  is  that  the  amount  of  the  credit,  the  value  of  the 
money,  be  definitely  stated  in  terms  of  the  adopted  standard 
commodity  and  that  the  stated  amount  of  that  commodity 
shall  be  obtainable  for  it,  directly  or  indirectly;  in  other 

383 


384  CONCLUSIONS  [286. 287 

Avords,  that  it  shall  be  redeemable  at  its  stated  value.  Still 
another  requisite  is  that  there  shall  be  a  communal  agreement, 
expressed  or  implied,  to  accept  the  tokens  of  the  credit,  the 
acknowledgments  of  debt,  as  money  (85). 

286.  The  Security  of  Money. — Just  as  the  value  of  a 
credit  is  derived  from  the  debtor's  wealth  that  is  subject  to 
seizure  and  sale  for  the  debt,  so  is  the  value  of  money  derived 
from  the  wealth  that  is  pledged  to  secure  its  redemption.  This 
wealth  is  the  real  substance  of  the  money.  The  token  is 
merely  the  evidence  that  its  bearer  is  part  owner — or  rather 
lessor  of  this  wealth  to  the  extent  of  the  face  value  of  the  token. 

In  the  ease  of  currency  issued  by  the  government  and  based 
on  its  "credit,"  the  community  is  the  debtor,  and  the  payment 
of  the  debt  created  by  the  issue  of  the  currency  is  as.sured  by 
the  government 's  taxing  power,  the  property  of  the  tax  payers 
becoming  the  substance  of  this  money. 

In  the  ease  of  bank  currency  the  desirability  of  a  double 
security — the  issuers'  and  the  agents'  pledges  (102) — has 
already  been  adverted  to;  and,  in  addition,  mutual  insurance 
of  the  currency  among  the  agents  of  issue  is  necessary  where 
the  security  is  not  absolutely  free  of  risk. 

In  the  ease  of  gold  coin  and  gold  certificates,  the  security 
consists  of  gold,  and  since  this  security  is  itself  also  the 
commodity  of  redemption,  a  further  security  is  not  necessary 
(94). 

But  the  case  is  different  if  the  security  consists  of  wealth 
which  cannot  be  used  directly  for  redemption.  Such  wealth 
is  subject  to  price  fluctuation,  and  possible  loss  from  this 
cause  must  be  completely  guarded  against  by  ample  margin 
and  insurance  (289). 

287.  The  Issuer's  Pledge. — Since  currency  is  needed  for 
no  other  purpose  than  that  of  exchanging  goods  and  services, 
the  objects  of  exchange,  the  goods  themselves  (87),  would 
seem  the  most  natural  security  for  the  currency.  Imagine  a 
hatter  needing  shoes,  a  shoemaker  desiring  to  buy  a  lot  of 
groceries,  and  a  grocer  wanting  a  hat.  These  wants  could  be 
supplied  by  exchanges,  if  a  medium  of  exchange  were  issued, 


£88]  CURRENCY  REFORM  385 

let  us  say,  to  the  hatter  on  the  security  of  his  stock  of  goods 
(301).  He  could  then  use  this  money  to  buy  shoes.  With  the 
same  money  the  seller  of  the  shoes  would  be  enabled  to  buy 
groceries,  and  then,  with  the  same  money,  the  grocer  could  buy 
a  hat.  After  the  money  is  returned  to  the  hatter  and  the  cir- 
cuit of  exchanges  is  completed,  the  money  would  have  served 
its  purpose  as  currency  and  might  be  retired. 

This  illustration  shows  the  function  of  money  and  the 
propriety  and  feasibility  of  employing  business  assets,  like 
merchandise,  as  issuer's  security.  As  a  matter  of  fact,  the 
transaction  is  typical  of  modern  deposit  banking  in  which,  as 
we  have  seen  (105),  the  real  issuer  of  the  medium  of  exchange 
is  the  borrower  who  obtains  bank  credit  upon  furnishing 
security  to  the  bank  in  the  form  of  pledges  of  business  assets 
(104). 

288.  The  Agent's  Pledge. — When  currency  is  emitted  by 
the  government  through  the  agency  of  a  bank,  the  latter,  as 
intermediary  agent  (105),  becomes  custodian  of  the  issuers' 
pledges,  namely,  the  promissory  notes  or  other  evidences  of 
indebtedness  furnished  by  the  real  issuers.  But  since  the 
people  look  to  the  government  for  the  guarantee  of  the  cur- 
rency notes,  the  government  naturally  requires  some  adequate 
pledge  on  the  part  of  the  banks,  and  this  pledge,  in  whatever 
form  it  may  be  given,  constitutes  the  agents'  pledge  of  the 
currency  (102). 

While  business  credits  may  properly  be  accepted  by  banks 
as  security,  they  are  not  well  adapted  to  be  so  accepted  by  the 
government.  The  uncertainty  of  business  credits  makes  it 
necessary  to  subject  them  to  repeated  scrutiny,  and  while  local 
banks  can  easily  keep  in  touch  with  the  business  standing  of 
their  customers,  it  would  be  impracticable  to  burden  the 
government  with  this  duty.  Even  securities  like  stocks  and 
bonds  of  various  enterprises  are  too  unstable  to  be  accepted 
and  looked  after  by  a  central  authority. 

At  first  glance  the  securities  now  received  for  the  issue  of 

national  bank  notes,  namely,  federal  bonds,  would  seem  to  be 

ideal  for  this  purpose.    But  apart  from  the  inadequacy  of  the 

volume  of  these  bonds,  and  even  if  state  and  municipal  bonds 

25 


386  CONCLUSIONS  [289 

were   to  be   accepted   in   addition,   there   is   a  fundamental 
objection  that  will  be  discussed  later  (333,  341), 

There  can,  however,  be  no  such  objection  to  the  acceptance 
of  real  estate  security.  Liens  on  real  property  not  exceeding, 
say,  one-half  of  the  assessed  value"*  would  furnish  a  sound 
foundation  for  currency,  as  there  would  be  ample  margin  in 
the  value  of  the  property  (302).  Such  security  would  require 
at  most  an  annual  revision  (303). 

Proposals  to  use  land  as  security  for  credit  currency  have 
been  opposed  by  pointing  to  the  historic  failures  of  Law's 
"Louisiana  Bubble"  and  of  the  assignats  and  mandats  of  the 
French  Revolution.  But  the  real  trouble  in  those  instances  was 
the  fact  that  the  notes  were  not  redeemable  in  a  specified  quan- 
tity of  a  specified  standard  commodity.  An  assignat  note  for  100 
livres  had  back  of  it  ostensibly  the  security  of  real  estate,  but 
as  the  security  was  not  specified  either  in  amount  or  location, 
it  was  practically  no  security  at  all.  The  denomination  was 
in  terms  of  "livres"  which,  at  the  time,  were  silver  coins 
weighing  about  one-fifth  of  an  ounce,  but  as  such  real  livres 
could  not  be  had  for  the  notes  from  the  issuer,  their  value  was 
only  that  of  an  indefinite  piece  of  land,  nowhere  definitely 
located,  which,  of  course,  was  nothing. 

If  a  debt  secured  by  land  or  real  estate  is  redeemable  at  its 
face  value  in  the  commodity  adopted  as  the  value  denominator 
or  its  market  equivalent,  it  cannot  possibly  share  the  fate  of 
the  assignats.  This  is  proven  by  the  general  preference  for 
mortgages  over  most  other  forms  of  security. 

The  expectation  that  land  values  will  ultimately  vanish 
on  the  introduction  of  the  single-tax  reform  might  be  advanced 
by  some  as  a  more  formidable  objection  to  the  use  of  liens  on 
land  as  a  security  for  currency,  but  it  will  be  shown  later  ( 329 ) 
that  this  objection  also  does  not  hold  good. 

289.  Insurance  of  Currency. — Despite  all  possible  pre- 
caution, and  even  though  the  margin  of  security  may  be 
ample  for  all  contingencies  that  may  be  foreseen,  an  occa- 

^°*  One-half  of  the  lowest  assessed  value  of  the  estate  during  the 
last  five  or  ten  years  would,  perhaps,  be  safer  as  a  limit,  in  order  to 
avoid  the  risk  arising  from  short-lived  land  booms. 


290]  CURRENCY  REFORM  387 

sional  depreciation  of  some  of  the  securities  beyond  the  margin 
is  still  within  the  scope  of  possibility.  In  order  to  be  prepared 
for  such  contingency,  an  additional  measure  of  safety,  in  the 
form  of  insurance,  is  desirable  (286). 

As  regards  the  issuers'  pledges — the  borrowers'  promissory 
notes — such  insurance  is  in  vogue  in  the  present  general  bank- 
ing system.  Though  these  pledges  are  not  at  all  free  from  the 
danger  of  depreciation,  the  banks  are  practically  assured 
against  loss  from  this  source  through  what  is  virtually  an 
insurance  premium  (102).  This  premium  is  collected  by  the 
banks  from  all  borrow^ers  as  that  part  of  the  interest  or  dis- 
count charged  on  loans  which  constitutes  payment  for  in- 
surance. In  this  way  the  borrowers  collectively  make  good 
the  losses  which  the  banks  suffer  through  the  occasional  failure 
of  some  of  their  borrowers  (251) .  Of  course,  only  that  portion 
of  interest  which  in  the  average  covers  the  losses  arising  in 
the  business  of  money  lending  constitutes  the  insurance  item. 
As  some  loans  are  more  risky  than  others,  the  banker  adjusts 
the  insurance  charges  accordingly,  by  varying  either  the  rate 
of  discount  or  interest,  or  by  imposing  other  conditions  (290). 

The  security  which  is  now  required  of  the  banks  as  agents 
in  the  issue  of  currency — and  which  we  have  called  the 
"agents'  pledge" — being  bonds  of  the  United  States,  is  prac- 
tically free  from  any  risk  of  depreciation,  and  therefore  re- 
quires no  insurance.  When,  however,  securities  are  accepted 
by  the  government  which  are  even  remotely  subject  to  de- 
preciation beyond  the  margin,  it  becomes  necessary  to  adopt 
some  system  of  insurance  to  cover  any  possible  losses  from  this 
source. 

290.  Insurance  of  Bank  Credit, — To  make  currency  abso- 
lutely safe  is  undeniably  of  paramount  importance.  For  this 
i"eason  ample  safeguards  are  now  adopted  to  assure  the  re- 
deemability  of  every  national  bank  note.  No  one  would  for  a 
moment  question  the  propriety  of  the  government  insisting 
on  all  reasonable  measures  requisite  for  this  purpose. 

Since  bank  credit  transferable  by  check  constitutes  the 
largest  item  in  the  aggregate  of  our  means  of  exchange,  the 
very  same  reasons  which  exist  for  effectively  assuring  the 


388  CONCLUSIONS  [290 

credit  represented  Dy  national  bank  currency  also  apply  to 
the  assurance  of  bank  credit  subject  to  check  (304a).  The 
bank's  depositors — the  holders  of  bank  credit — are  in  a  meas- 
ure insured  against  loss  from  the  partial  or  total  failure  of 
some  of  the  real  issuers  of  the  bank  credit,  the  borrowers  from 
the  bank,  as  above  explained.  But  this  insurance  is  incom- 
plete, as  it  does  not  secure  the  depositors  against  a  partial 
or  total  failure  of  the  bank  itself.  There  are  many  reasons 
why  the  system  of  insurance,  mutual  as  regards  the  depositors 
of  each  individual  bank,  should  be  amplified  through  a  mutual 
insurance  system  embracing  all  the  banks  of  a  country,  or  at 
least  of  a  district.  Nevertheless,  such  insurance  has  not  even 
been  seriously  considered  until  within  recent  years,  and  owing 
to  the  fear  that  this  measure  would  foster  reckless  banking, 
but  few  attempts  to  put  it  into  practice  have  thus  far  been 
made  (3046). 

The  opposition  to  this  proposition  is  neither  reasonable  nor 
wise,  since  all  concerned  would  be  benefited,  the  banks  as  well 
as  the  depositors.  When  fire  insurance  was  first  preached, 
similar  antagonism  was  encountered  on  the  ground  that  it 
would  encourage  arson,  and  although  it  is  much  easier  to  con- 
ceal arson  than  bank  fraud,  the  expediency  of  fire  insurance 
is  now  generally  recognized.  The  danger  of  a  run  on  a  bank, 
often  caused  by  some  unfounded  rumor,  would  be  completely 
removed  by  insurance.  Numerous  hoards  of  monej^,  now  hid- 
den away,  would  be  brought  to  the  banks.  It  is  not  unlikely 
that  in  this  way  the  cash  reserves  would  be  increased  ten 
per  cent,  or  more,  resulting  in  a  proportionate  extension  of 
banking  facilities.  These  obvious  advantages  would  more  than 
counterbalance  such  losses  as  might  be  entailed  upon  careful 
and  conservative  bankers  through  the  assumption  of  unwar- 
ranted risks  by  those  less  conscientious.  It  is  only  a  question 
of  formulating  and  enacting  an  efi^ective  system  of  bank  ex- 
amination and  of  imposing  such  obligations  on  the  stock- 
holders, and  particularly  the  directors,  of  a  defaulting  bank 
that  only  in  rare  and  exceptional  cases  a  contribution  from 
other  banks  would  be  required.  Through  such  a  system  the 
danger  of  improper  banking  and  consequent  losses  would  be 


Ml]  CURRENCY  REFORM  389 

so  far  eliminated  that  every  objection  to  a  system  of  insuring 
bank  deposits  would  be  removed.  As  it  is,  each  bank  now 
protects  itself  against  loss  from  defaulting  borrowers  by  charg- 
ing all  borrowers  with  the  insurance  item  of  interest,  and 
there  is  certainlj^  no  adequate  reason  why  depositors  of  banks 
should  not  be  similarly  protected  against  loss  from  the  failure 
of  a  bank  by  a  system  of  insurance  among  the  banks  themselves 
(220,  289,  304c). 

291.  The  Natural  Limit  of  the  Volume  of  Currency. — 
The  question  regarding  the  amount  of  currency  that  should 
be  issued  may  here  be  briefly  touched  upon.  There  is  no 
reason  for  restrictions  apart  from  those  which  are  necessary 
to  insure  the  redeemability  of  all  notes  in  the  standard  com- 
modity (302).  So  long  as  proper  security  is  furnished  and 
deposited  with  the  government — the  only  agency  to  whom  the 
people  can  confidently  look  for  the  requisite  guarantee  of  the 
validity  of  the  currency  notes — the  issue  of  notes  may  be 
safely  extended,  since  the  value  of  such  notes  cannot  vary 
from  the  gold  in  which  they  are  redeemable.  Abundance  of 
such  currency  cannot  have  any  but  a  beneficial  effect  upon 
commerce  and  industry. 

Nor  is  there  any  real  danger  involved  in  an  issue  of  more 
money  than  ls  actually  required  for  the  processes  of  pro- 
duction and  exchange.  No  one  possessing  monetizable  credit 
will  have  it  monetized  merely  for  the  sake  of  doing  so,  and 
whenever  there  is  a  real  need  for  more  money,  every  obstacle 
to  its  issue  is  a  restraint  upon  commerce.  Every  such  restraint 
diminishes  the  amount  of  work  that  can  be  done  and  abridges 
the  right  of  men  to  work  (2G1).  In  the  absence  of  undue 
restrictions  the  volume  of  money  would  simply  adapt  itself  to 
the  demand,  the  natural  limit  of  which  is  reached  when  there 
is  no  advantage  to  be  gained  by  any  possessor  of  credit  in 
having  it  monetized.  And  should  it  happen  that  the  currency 
increa.ses  to  an  amount  more  than  enough  to  satisfy  this  de- 
mand, the  only  result  would  be  that  each  dollar  would,  in  the 
average,  be  used  less  frequently.  At  present,  there  being  not 
enough  of  the  circulating  medium,  the  rapidity  of  circulation 
is  close  to  the  maximum  (120,  121),  and  yet  the  monetary  flow 


390  CONCLUSIONS  [292 

cannot  keep  pace  with  the  industrial  flow  (270).  Under 
present  conditions  commercial  debts  are  always,  even  in  the 
"prosperous"  period  of  the  cycle  of  business  activity,  much 
greater  than  need  be,  and  they  call  for  an  excessive  extension 
of  business  credits  and  a  prolonged  postponement  of  pay- 
ments as  the  cycle  approaches  the  critical  period.  A  super- 
abundance of  properly  secured  currency,  even  if  more  than 
sufficient  to  meet  all  the  requirements  of  the  industrial  flow, 
far  from  causing  a  depreciation  of  money,  would  simply 
result  in  relieving  the  unhealthy  business  conditions  which 
now  prevail. 

292.  Currency  Redemption. — As  we  have  mentioned  re- 
peatedly, credit  currency,  in  order  to  circulate  at  par  with 
gold,  must  be  either  redeemable  in  gold,  or  accepted  by  its 
issuer  in  payment  at  par  with  gold. 

Although  under  the  present  banking  laws  of  the  United 
States  national  banks  may  refuse  to  redeem  their  notes  in 
gold  and  proffer  legal-tender  notes  instead  (295a),  redemp- 
tion in  gold  can  be  effected,  at  least  in  an  indirect  manner, 
inasmuch  as  legal-tender  notes  are  redeemed  by  the  govern- 
ment in  gold  on  demand.  In  a  similar  roundabout  way  bank 
checks  are  also  redeemable  in  gold,  apart  from  the  fact  that 
banks  generally  pay  checks  in  gold  when  requested. 

If  our  present  patchwork  currency  is  to  be  replaced  by  a 
single,  uniform  issue  (2956),  that  currency  must  be  directly 
redeemable.  To  this  end  a  certain  amount  of  gold  would  be 
required  as  reserve.  This  condition  would  seem  to  impose  an 
effective  limitation  on  the  volume  of  notes  that  can  be  issued, 
the  extent  of  which  must  depend  on  the  ratio  which  the  gold 
reserve  is  to  bear  to  the  volume  of  the  note  issue.  The  next 
question,  then,  is,  how  far  this  ratio  can  be  reduced  with  due 
regard  to  the  requirement  of  redemption. 

Experience  has  shown  that  the  demand  for  redemption 
varies  between  wide  limits  at  different  times,  and  unless  pro- 
vision is  made  to  meet  the  greatest  demand  that  is  likely  to 
arise,  redemption  on  demand  will  fail  at  times.  Suppose  it 
could  be  shown  that  the  gold  reserve  may  not  be  less  than 


292]  CURRENCY  REFORM  391 

twenty  per  cent,  of  the  total  issue  without  jeopardizing  the 
parity  of  currency,  then  the  amount  of  currency  cannot  safely 
exceed  five  times  the  amount  of  gold  held  for  its  redemption. 

The  difficulty  thus  presented  may  be  stated  as  follows.  A 
large  proportion  of  reserve  is  necessary  if  currency  is  to  be 
redeemable  in  gold  on  demand  under  all  practical  conditions. 
In  fact,  unless  the  gold  held  for  redemption  fully  equals  the 
issue,  as  is  the  case  with  gold  certificates,  redemption  on  de- 
mand is  subject  to  the  proviso  that  7iotes  will  not  he  presented 
for  redemption  faster  than  the  stock  of  gold  can  he  replenished 
he  fore  it  is  exhausted.  On  the  other  hand,  an  expansion  of 
the  issue  is  possible  only  hy  reducing  the  ratio  of  gold  reserve. 
"What  ratio,  then,  can  be  safely  adopted?  The  same  problem 
exists  with  regard  to  bank  credit  subject  to  check.  All  bank 
depositors  have  the  right  to  withdraw  their  deposits  in  cash, 
but  it  is  well  understood  that  banks  never  have  on  hand  as 
much  cash  as  their  liabilities  to  depositors  aggregate. 

The  present  system  is  really  a  compromise  between  the  two 
extremes.  A  reserve  fund  amounting  to  from  15  to  25  per 
cent,  of  the  deposit  liabilities  has  come  to  be  considered  suffi- 
cient under  ordinary  conditions  to  enable  the  banks  to  meet 
all  current  demands  for  cash  (104),  and  national  banks  are 
therefore  required  by  law  to  maintain  reserves  of  that  amount. 
This  proportion  of  cash  reserve  is  however  reduced  to  less 
than  one-eighth  through  the  operation  of  the  banking  laws 
which  permit  deposits  in  certain  specified  banks  to  be  counted 
as  part  of  the  reserve  by  the  banks  making  the  deposits,  a 
condition  which,  however,  is  not  permitted  to  those  specified 
banks. 

And  yet,  with  all  these  provisions,  there  are  times  when 
banks,  throughout  the  country,  are  unable  to  meet  the  demands 
of  their  depositors  for  cash.  The  existing  compromise  is  mani- 
festly inadequate  to  prevent  financial  crises.  To  compel  banks 
to  have  a  larger  amount  of  cash  to  meet  the  demand  of  de- 
positors, it  has  been  proposed  that  they  should  be  required  to 
hold  a  large  percentage  of  their  liabilities  in  the  form  of  gold 
coin  or  bullion.  But  this  would  infallibly  bring  about  a  con- 
traction, not  only  of  the  currency,  but  also  of  bank  credit,  to 


392  CONCLUSIONS  [293 

the  great  detriment  of  industrial  welfare.  If  it  were  possible 
to  reduce  the  present  demand  for  gold,  the  proportion  of  that 
metal  held  in  reserve  might  be  reduced  materially,  and  to  find 
whether  this  is  possible,  the  nature  of  the  present  demand  for 
gold  requires  to  be  analyzed. 

293.  The  Demand  for  Gold. — Modern  processes  of  mining 
gold  have  made  it  possible  to  obtain  the  metal  on  a  commercial 
scale  from  more  extensive  deposits  than  ever  before,  and  the 
output  has  attained  unprecedented  proportions.  Of  this  con- 
tinuous supply  a  portion  is  used  in  the  arts,  another  portion 
is  hoarded,  still  another  portion  is  put  into  circulation  as  coin, 
and  the  remainder  goes  to  swell  the  tons  upon  tons  already 
lying  idle  in  treasuries  and  bank  vaults,  where  the  gold  is  used 
as  reserve  for  credit  currency  and  bank  credit.  The  bulk  of 
the  metal  is  thus  dug  out  of  mines,  only  to  be  buried  in  costly 
fire  and  burglar  proof  vaults. 

The  demand  for  gold  in  the  arts  and  industries  is  engen- 
dered by  the  faculty  of  the  metal  directly  or  indirectly  to 
satisfy  desires,  just  as  the  demand  for  any  other  commodity  is 
induced  by  its  usefulness  to  man.  Although  that  usefulness 
alone  can  explain  the  desire  for,  and  hence  the  value  of  gold, 
only  a  part  of  the  output  is  absorbed  in  the  industrial  channels. 
The  remainder  is  applied  for  monetaiy  purposes,  for  which 
the  metal  gold  is  adapted  not  so  much  on  account  of  its  specific 
properties,  as  principally  because  of  its  generally  accepted 
value. 

The  use  of  gold,  or,  for  that  matter,  of  silver,  as  currency 
is  to  be  traced  to  the  widely  accepted  but  erroneous  idea  that 
standard  coin  alone  is  real,  or,  as  it  is  frequently  termed, 
"basic"  money,  and  that  all  other  devices  for  mediating 
exchanges  are  only  "money  substitutes"  (88). 

The  use  of  gold  as  reserve  in  banks  has  grown  up  with  the 
modern  system  of  banking.  As  has  already  been  shown  in  an 
earlier  chapter  (103),  the  original  gold  and  silver  notes  were 
storage  receipts,  the  amount  of  metal  in  store  having  been 
equal  to  the  sum  of  the  outstanding  notes.  Subsequently  the 
amount  of  the  outstanding  notes  was  gradually  increased,  the 
added  notes  having  been  secured  by  pledges  of  other  wealth. 


293]  CURRENCY  REFORM  393 

But  in  order  to  be  prepared  at  any  time  to  give  ' '  real  money ' ' 
for  any  of  the  outstanding  "money  substitutes"  that  might  be 
presented  for  exchange,  that  is,  for  "redemption,"  the  issuers 
of  the  notes  found  it  necessarj^  to  retain  on  hand  an  amount 
of  the  metal  equal  to  about  one-quarter  of  the  outstanding 
notes.  This  experience  has  prompted  the  present  laws  which 
require  banks  to  maintain  a  reserve  amounting  to  a  certain 
fractional  part  of  the  deposits,  with  this  difference,  that  other 
forms  of  currency,  and  even  their  own  deposits  in  certain 
other  banks,  may  be  counted  as  reserve  in  addition  to  gold. 

Owing  to  these  regulations  the  total  lending  capacity  of  all 
banks  of  the  countrj^ — in  other  words,  the  possible  volume  of 
bank  credit  subject  to  check — is  about  eight  times  the  actual 
amount  of  gold  and  lawful  money  held  in  reserve  by  all  these 
banks  (104).  It  follows,  then,  that  for  each  dollar  of  gold 
bullion  or  lawful  money  added  to  the  sum  total  of  bank  reserves 
the  lending  capacity  of  all  the  banks  of  the  country  is  increased 
not  only  by  that  one  dollar,  but  by  about  seven  dollars  more. 

Of  the  stock  of  money  available  for  bank  reserve  under 
present  laws,  standard  coin  is  the  only  form  which  is  not 
limited  by  law,  and  the  supply  of  gold  is  therefore  the  only 
source  available  for  a  general  increase  of  banking  reserves. 
Every  dollar's  worth,  that  is  to  say,  every  23.22  grains  of 
pure  gold,  added  to  bank  reserves,  permits  the  lending  out 
of  about  eight  dollars  at  interest.  It  is  not  surprising,  then, 
that  banks  are  so  eager  to  accumulate  gold,  and  that  their 
rivalry  for  its  possession  reaches  a  world-wide  scope.  As  a 
result  of  this  competition  vast  amounts  of  gold  are  shipped 
from  time  to  time  one  way  or  another  between  the  financial 
centres  of  the  world. 

It  is  often  said  that  these  shipments  are  made  to  settle  the 
balances  of  international  commerce;  but  while  this  may  be 
true  in  some  cases,  it  is  certainly  not  in  all.  The  shipment  of 
some  eighty  million  dollars'  worth  of  gold  from  London  to 
New  York  in  the  fall  of  1907  was  described  in  the  daily  press 
at  the  time  as  a  master  stroke  of  finance  to  break  the  force  of 
the  panic  of  that  year.  But  what  oflico  did  this  gold  perform? 
There  was  no  abnormal  demand  for  industrial  purposes,  nor 


394  CONCLUSIONS  [294 

was  there  any  excessive  call  for  redeeming  legal-tender  notes, 
nor  was  this  gold  needed  for  currency,  for  practically  none  of 
it  found  its  way  into  circulation.  It  remained  in  the  vaults 
of  banks  and  of  the  New  York  sub-treasury.  The  only  use 
to  which  this  gold  was  put  was  to  amplify  the  reserves  of 
banks  which  had  fallen  off  because  less  cash  was  being  returned 
to  the  banks  than  was  checked  out.  It  served  the  purpose  of 
maintaining  legal  bank  reserves — nothing  else. 

The  question  naturally  arises :  Why  were  not  other  forms 
of  security  applied  for  this  purpose  ?  Surely  there  was  ample 
wealth  at  the  command  of  the  bankers  to  supply  the  needed 
security.  The  fact  is,  the  law  required  that  bank  reserves 
shall  consist  of  lawful  money,  and  since,  for  some  reason, 
lawful  money  was  not  being  returned  to  the  banks  as  fast  as 
it  was  being  drawn  out,  the  banks  were  obliged  to  replenish 
the  depleted  reserves  in  the  only  way  left  open  to  them  by  our 
laws,  namely,  by  importing  gold. 

As  far  as  the  economic  requirements  of  the  case  are  con- 
cerned, any  adequate  security  would  have  served  the  same 
purpose  as  the  gold  itself.  But  existing  law  made  a  dis- 
tinction, and  the  law  had  to  be  complied  with.  What,  it  may 
be  asked,  is  the  intent  of  such  law  ? 

According  to  many  prominent  writers  on  the  subject, 
standard  coin  alone  is  * '  real "  or  "  basic ' '  money,  on  which  all 
"money  substitutes"  must  be  founded;  hence  it  is  held  that 
every  system  of  currency  must  be  supported  by  an  ample 
quantity  of  basic  money  to  guard  it  against  collapse.  The 
prevalence  of  this  belief  accounts  for  the  extensive  use  of  gold 
for  currency,  and  particularly  for  the  laws  which  restrict  bank 
reserves  to  "lawful"  money,  while  at  the  same  time  preclud- 
ing the  increase  of  "lawful"  money  beyond  such  additions  as 
may  be  afforded  through  the  mining  of  gold.  Thus  we  ob- 
serve two  causes  of  demand  for  gold  as  money,  in  that  it  is 
used  as  currency  in  the  form  of  coin,  and  as  bank  reserve  in 
the  form  of  bullion  or  of  coin. 

294.  Can  the  Monetary  Demand  for  Gold  be  Reduced? — 
When  we  consider  that  gold,  when  put  in  the  form  of  coin,  or 
held  in  place  of  coin  in  the  form  of  bullion  as  bank  reserve, 


294]  CURRENCY  REFORM  395 

is  put  out  of  use  entirely,  except  as  a  f  onn  of  collateral  security, 
the  question  forcibly  obtrudes  itself  whether  there  is  not 
some  way  of  organizing  a  money  system  with  gold  as  a  standard 
of  value,  but  without  having  to  use  the  gold  itself  as  a  collateral 
security. 

As  regards  the  use  of  gold  for  currency,  we  have  before  ils 
the  fact  that  almost  all  over  the  United  States  and  Canada, 
and  to  a  large  extent  in  Europe  generally,  it  is  already  prac- 
tically displaced  by  credit  currency  of  one  form  or  another. 
Yet,  notwithstanding  this  substitution,  gold  has  remained  the 
standard  of  value.  There  is  no  reason  why  this  process  should 
not  be  carried  to  its  logical  conclusion. 

Inasmuch  as  credit  currency  fulfils  all  the  requirements  of 
a  medium  of  exchange,  there  is  really  no  need  for  coining  the 
metal  gold.  The  work  of  the  mint  might  therefore  be  confined 
to  preparing  bars  of  refined  gold  to  be  used  instead  of  coin 
for  redeeming  credit  currency  (302).  Gold  would  then  cease 
to  be  used  as  a  money  substance,  but  would  remain  the  re- 
demption substance.  With  gold  currency  completely  replaced 
by  credit  currency,  the  quantity  of  the  metal  available  for 
purposes  of  redemption  would  be  correspondingly  increased. 

This  would  really  amount  to  a  demonetization  of  gold  with- 
out, however,  abandoning  gold  as  our  measure  of  value.  The 
unit  of  value,  the  dollar,  would  still  be  23.22  grains  of  pure 
gold,  currency  being  redeemable  in  gold  metal  at  that  rate. 
But  the  call  for  redemption,  the  demand  for  gold  in  exchange 
for  currency,  would  be  reduced  to  the  demand  for  industrial 
purposes,  for  the  metal  tendered  in  redemption  would  be 
merchandise  and  not  money.  Gold  would  thus  be  in  the  same 
category  with  all  other  forms  of  merchandise,  its  holder  having 
to  find  a  purchaser  for  it  if  he  wants  money  in  its  place. 

As  regards  the  use  of  gold  for  hank  reserves,  it  has  been 
noted  that  in  this  capacity  the  metal  serves  two  purposes  which 
must  be  considered  separately.  In  one  capacity  it  is  part  of 
the  security  for  the  bank  notes  and  bank  credit  in  circulation. 
When  so  employed,  not  all  of  it  is  held  by  the  banks,  but  a 
large  portion  is  stored  in  the  vaults  of  the  United  States 
treasuiy  and  sub-treasuries  and  is  represented  in  the  banks  in 


396  CONCLUSIONS  [295 

the  form  of  gold  certificates  and  gold  deposit  receipts.  In 
the  other  capacity  it  serves  as  a  store  from  which  redemption 
of  the  outstanding  notes  of  the  banks  is  effected. 

Viewing  the  gold  held  in  reserve  in  its  capacity  as  security, 
it  is  plainly  to  be  seen  that  it  can  be  replaced  by  pledges  of 
other  forms  of  wealth  (69).  Gold  has  no  inherent  advantage 
in  this  capacity  over  other  forms  of  wealth,  when  the  latter  is 
pledged  in  quantity  ample  for  the  purpose.  So  far  as  con- 
cerns the  making  of  the  circulating  medium  secure,  there  is 
absolutely  no  need  of  a  definite  store  of  the  metal  gold,  and 
therefore  no  need  for  legislative  provision  to  that  end. 

But  in  its  second  capacity,  namely,  in  that  of  serving  as  a 
medium  of  redemption,  it  cannot,  so  long  as  gold  is  the  value 
denominator,  be  replaced  by  any  other  form  of  wealth,  how- 
ever amply  pledged,  nor  by  currency  notes  of  any  kind.  The 
necessity  of  providing  for  redemption  requires  absolutely  that 
gold  be  held  in  reserve.  The  only  question  in  this  regard  is 
the  quantity  required  for  this  purpose. 

295.  Centralized  Redemption. — National  banks,  when 
called  upon  to  redeem  any  of  their  notes,  may  do  so  with  legal- 
tender  notes  instead  of  gold  (292a).  If  they  do  supply  gold, 
it  is  accommodation,  not  obligation.  This  exchange  of  legal- 
tender  notes  for  bank  notes  cannot  really  be  considered  an 
act  of  redemption,  for  it  is  merely  an  exchange  of  one  credit 
instrument  for  another  of  essentially  equal  import.  The  main 
distinction  between  legal-tender  notes  and  bank  notes  is  that 
which  is  arbitrarily  made  by  legislation.  From  an  economic 
standpoint  both  are  virtually  identical.  If  there  is  a  differ- 
ence, it  is  rather  in  favor  of  the  national  bank  notes,  these 
being  secured  by  the  assets  of  the  issuing  banks  as  well  as  by 
national  credit.  The  law  that  makes  it  appear  that  this  ex- 
change of  one  credit  instrument  for  another  is  an  act  of  re- 
demption really  provides  that  the  process  of  redeeming  shall 
be  an  indirect  one,  involving  a  double  operation,  namely  first, 
the  exchange  of  national  bank  notes  for  legal-tender  notes, 
and  then  the  exchange  of  the  latter  for  gold. 

In  a  project  of  currency,  such  as  it  is  our  purpose  to 
present,  there  is  of  course  no  room  for  the  multifarious  forms 


295]  CURRENCY  REFORM  397 

of  our  present  complicated  system.  The  elimination  of  stand- 
ard coin,  as  above  suggested,  would  go  far  toward  effecting  a 
much  desired  simplification.  Besides  subsidiary  coin  nothing 
more  would  be  needed  than  one  single  kind  of  bank  notes  of 
various  denominations,  issued  on  the  general  principle  of  those 
of  the  national  banks  (292&),  admitting  as  security  for  the 
notes  not  only  obligations  of  the  government,  but  also  other 
obligations  of  unquestionable  value;  the  notes  to  be  redeem- 
able in  gold,  and  to  be  issued  in  quantity  limited  only  by 
demand  conditioned  on  compliance  with  the  indispensable 
requirements  of  security  and  redemption. 

With  notes  issued  on  such  a  plan,  their  redemption  would 
serve  no  real  purpose  except  when  the  gold  is  needed  as 
merchandise,  either  in  the  industries  or  for  adjusting  inter- 
national balances.  This  would  be  especially  the  case  if  the 
gold  given  in  redemption  of  the  notes  were  furnished,  as  here 
proposed,  in  the  form  of  bullion.  Only  those  holders  of  notes 
requiring  gold  as  such  would  have  occasion  to  present  notes 
for  redemption,  hence  to  obligate  banks  to  give  gold  for  their 
notes  on  demand,  would  really  be  to  compel  them  to  become 
gold  merchants  to  that  extent.  Such  a  requirement  would 
place  the  banks  at  a  marked  disadvantage  as  compared  with 
other  merchants,  for  if  a  dealer's  stock  of  goods  runs  short, 
so  that  he  cannot  serve  his  ciLstomers  at  a  moment's  notice, 
his  standing  as  a  merchant  does  not  thereby  suffer,  while  if  a 
bank  were  under  legal  obligation  to  supply  a  customer  with 
gold  on  demand,  its  failure  to  do  so  would  under  the  law  con- 
stitute an  act  of  bankruptcy. 

This  danger  is  obviated  in  the  present  national  banking 
system  by  the  expedient  of  relegating  to  the  national  treasury 
the  duty  of  gold  redemption,  which  is  accomplished  in  the 
way  above  described.  The  individual  banks  are  thereby  freed 
from  the  obligation  of  maintaining  a  gold  reserve  to  meet  the 
local  demands.  But  this  system  of  centralized  redemption  puts 
upon  the  federal  government  the  onerous  duty  of  maintain- 
ing the  gold  reserve.  In  the  case  of  the  issue  of  a  uniform 
currency  through  national  banks,  the  system  of  having  the 
government  redeem  the  notes  may  be  continued,  but  the  duty 


398  CONCLUSIONS  [296 

of  keeping  the  central  gold  reserve  unimpaired  should  then 
logically  be  imposed  on  the  banks,  and  this  could  be  done 
through  a  system  of  assessments  as  occasion  requires. 

Under  this  system  the  holders  of  notes  would  have  the  right 
to  demand  gold  in  exchange  for  the  notes  only  from  the  gov- 
ernment, just  as  is  the  case  under  the  present  system ;  but  the 
redemption  fund  would  be  kept  up  by  the  banks,  which  is  not 
the  case  at  present.  However,  while  the  banks  would  not  be 
under  the  additional  obligation  to  furnish  gold  for  notes  over 
the  counter,  any  more  than  they  are  under  the  existing  system, 
there  would  be  nothing  to  prevent  them  from  accommodating 
their  customers,  as  they  do  now,  when  they  can  conveniently 
do  so. 

296.  Deferred  Redemption. — If  the  greatest  possible 
freedom  of  expansion  and  consequent  accommodation  of  the 
medium  of  exchange  to  the  requirements  of  commerce  is  to 
be  attained,  we  must  find  how  small  a  proportion  of  gold  metal 
would  suffice  as  a  redemption  fund  for  an  issue  of  currency 
notes  redeemable  in  gold.  "Whatever  system  of  note  issue  and 
redemption  may  be  adopted  in  which  the  issue  is  greater  in 
amount  than  the  gold  held  for  its  redemption,  there  always 
remains  the  possibility  that  at  some  time  the  demand  for 
redemption  may  exceed  the  reserve  held  for  that  purpose.  A 
system  of  centralized  redemption  would  doubtless  have  the 
effect  of  reducing  this  danger,  but  could  not  wholly  remove  it. 

Experience  has  proved  that  at  critical  junctures  of  busi- 
ness disturbance  banks  are  unable  to  meet  their  obligations  to 
pay  cash  to  their  depositors  on  demand.  As  is  well  known, 
the  drain  upon  banks  during  a  crisis  is  so  persistent  that  even 
some  of  the  most  thoroughly  solvent  institutions  cannot  keep 
up  their  reserves.  Ordinarily  this  condition  would  mean 
bankruptcy,  but  at  such  periods  banking  laws  are  in  a  measure 
held  in  abeyance,  if  only  for  the  reason  that  their  enforcement 
would  but  intensify  the  prevailing  distress. 

This  at  once  suggests  a  simple  arrangement  by  which  a 
small  gold  reseiwe  would  amply  suffice.  "We  need  only  enact 
into  law  in  regard  to  gold  redemption  that  which  has  hereto- 
fore been  permitted  in  contravention  of  the  law  in  regard  to 


296]  CURRENCY  REFORM  399 

cash  obligations  of  banks.  In  other  words,  disaster  due  to  a 
possible  exhaustion  of  the  gold  reserve  can  be  met  by  a  legal- 
ized postponement  of  actual  gold  redemption,  that  is  to  say, 
by  allowing  redemption  to  be  deferred  for  a  limited  period 
when,  and  only  when,  occasion  absolutely  requires  (303a). 
The  time  limit  would  have  to  be  determined  by  the  exigencies 
of  the  occasion  and  with  regard  to  the  methods  adopted  for 
replenishing  the  redemption  store  of  gold. 

This  proposition  should  not  be  misunderstood.  It  does  not 
include  giving  a  bank  the  right  to  defer  the  cashing  of  checks 
of  its  depositors.  On  the  contrary,  the  object  is  to  facilitate 
the  issue  of  currency  so  that  the  supply  of  cash  will  always 
be  sufficient.  It  is  only  to  the  redemption  of  the  currency  in 
gold  that  the  proposed  delay  would  apply. 

Under  this  system  the  notes  would  ordinarily  be  redeem- 
able in  gold  on  demand,  but  in  case  of  emergency  that  re- 
demption would  be  subject  to  a  postponement  for  a  time  suffi- 
cient to  replenish  the  redemption  fund.  This  would  be  but  a 
limited  period  under  any  possible  circumstances. 

It  is  of  course  clear  enough  that  this  is  directly  opposed  to 
the  frequently  propounded  doctrine  that  no  monetary  system 
on  a  gold  basis  can  be  safe  and  sound,  unless  the  currency  is 
redeemable  in  gold  on  demand.  Let  us  more  closely  examine 
whether  this  condition  is  really  indispensable. 

Apart  from  the  use  of  gold  for  currency  and  bank  reserves, 
its  use  in  the  industries  is  the  only  reason  for  its  demand.  In 
the  field  of  industry  gold  is  merchandise,  just  as  pig  iron  is  to 
the  founder,  and  wool  or  yarn  is  to  the  cloth  manufacturer. 
When  these  business  men  find  their  respective  sources  of 
supply  in  the  market  temporarily  exhausted,  in  other  words, 
when  the  goods  they  need  are  not  to  be  found  in  stock,  they 
must  needs  await  their  turn  to  be  supplied.  A  similar  short- 
age of  gold  for  redeeming  notes  would  simply  mean  that  the 
stock  of  gold  on  hand  has  run  short  and  needs  replenishing. 

The  holder  of  money  has  been  described  by  John  Stuart 
Mill  as  one  posses.sing  "a  right  to  a  certain  value  of  the 
produce  of  the  country,  to  be  selected  at  pleasure."  But  this 
statement  of  the  right  is  too  broad.     The  holder  of  money 


400  CONCLUSIONS  [296 

cannot  command  with  it  any  produce  of  the  country,  unless 
the  same  is  being  offered  in  the  market,  even  though  such 
produce  may  exist  in  abundance.  Mill's  statement  should 
therefore  be  amended  to  read:  "a  right  to  a  certain  value  of 
such  produce  of  the  country  as  is  offered  in  the  market." 
Accordingly,  a  holder  of  currency,  having  a  right  to  gold  in 
exchange  for  it,  should  have  this  right  subject  to  the  supply 
of  gold  in  the  market,  and  if  the  market  supply  of  gold  falls 
short  of  the  demand  in  the  same  market,  a  delay  of  the  supply 
would  be  a  natural  consequence,  just  as  would  be  the  case  if 
the  supply  of  any  other  product  were  momentarily  insufficient. 
What  reason  have  we  for  requiring  a  supply  of  gold  to  be 
kept  in  store  to  meet  07i  the  instant  every  possible  demand  for 
it?  No  one  would  expect  this  with  regard  to  any  other  mer- 
chandise. The  adoption  of  the  gold  standard  does  not  and 
cannot  involve  the  obligation  of  maintaining  an  inexhaustible 
supply  of  gold  for  purposes  of  redemption,  if  for  no  other 
reason  than  that  such  a  supply  is  physically  impossible.  As  a 
matter  of  fact,  repeated  experiences  have  demonstrated  con- 
clusively that  an  immediate  redemption  in  gold  is  not  neces- 
sary to  keep  notes  at  par.  Among  these  experiences  may  be 
cited  several  noted  instances. 

After  the  Bank  of  England,  in  February  of  1797,  was 
granted  the  right  to  temporarily  suspend  specie  payment,  its 
notes  continued  to  circulate  at  par.  Depreciation  ensued  only 
at  a  later  period,  when  it  became  apparent  that  resumption  of 
specie  payment  might  be  delayed  indefinitely. 

From  the  time,  in  1875,  when  the  Congress  of  the  United 
States  provided  for  the  resimiption  of  specie  payment,  the 
value  of  the  then  depreciated  greenbacks  steadily  rose  and 
attained  parity  with  gold  some  time  before  the  first  of  January-, 
1879,  the  date  set  for  resumption.  Moreover,  the  depreciation 
of  the  notes  during  the  period  preceding  the  date  of  resumption 
was  much  less  than  the  then  current  rate  of  discount  on  first 
class  obligations  payable  on  that  date. 

As  already  noted,  the  so-called  "redemption"  of  bank 
notes  in  legal-tender  notes  cannot  be  considered  as  actual  re- 
demption.   Under  our  present  laws  bank  notes  are  not  really 


296]  CURRENCY  REFORM  401 

redeemable  in  gold  on  demand,  yet  they  are  accepted  in  the 
commercial  world  without  hesitation  at  par  with  gold. 

Furthermore,  legal-tender  notes  are  legally  redeemable 
only  at  the  treasury  and  sub-treasuries  of  the  United  States. 
Such  notes,  when  circulating  at  a  distance  from  the  nearest 
point  of  redemption,  are  by  no  means  immediately  convertible 
into  gold,  yet  they  have  remained  at  par  with  gold  since  the 
time  when  specie  payment  was  resumed  in  1879. 

During  the  period  before  subsidiary  coin  was  made  re- 
deemable in  standard  coin,  and  while  it  was  accepted  by  the 
government  at  par  only  when  tendered  in  limited  quantity,  it 
yet  freely  circulated  at  par  with  standard  coin. 

During  monetary  panics  like  those  of  1893  and  1907  it  was 
the  scarcity  of  currency  as  a  medium  of  exchange,  and  not 
the  scarcity  of  gold  as  a  medium  of  redemption  which  char- 
acterized the  situation.  Nobody  objected  to  any  of  the  cur- 
rency, whether  legal-tender  notes,  bank  notes,  silver  dollars  or 
silver  certificates.  Because  of  the  lack  of  currency,  clearing 
house  certificates  had  to  be  issued  and  were  freely  accepted  as 
means  of  payment.  The  question  was  not  one  of  a  demand 
for  gold,  but  of  a  demand  for  currency.  The  fact  that  in  1907 
many  millions  of  dollars'  worth  of  gold  was  imported  only 
proved  the  great  demand  for  a  medium  of  exchange,  for  there 
was  no  unusual  demand  for  a  medium  of  redemption.  The 
supply  of  available  money  for  bank  reserve  was  cut  ofi:  by  the 
general  resort  to  hoarding,  and  no  other  source  of  supply  was 
open  under  the  existing  laws  except  the  gold  market  abroad. 
If  legal  currency  could  have  been  issued  freely  on  security 
of  actual  wealth  other  than  gold,  there  would  have  been  no 
lack  of  currency,  and  consequently  no  panic;  and  the  im- 
portation of  gold  would  not  have  been  necassary. 

All  these  instances  clearly  prove  that  the  immediate  con- 
vertibility of  currency  into  gold  is  not  necessary  to  keep  it  at 
par  with  gold.  An  assured  certainty  of  redemption  within 
a  limited  space  of  time  has  proved  to  be  amply  sufficient  (315). 

As  already  stated,  this  discussion  has  bearing  only  on  the 
redemption  of  currency  in  gold,  but  not  on  the  cashing  of 
valid  checks.  Were  such  a  measure  as  that  here  proposed 
26 


402  CONCLUSIONS  [297 

once  adopted,  any  bank  could  obtain  currency  on  terms  which 
would  leave  it  no  valid  excuse  for  failure  to  provide  all  the 
cash  that  may  be  legitimately  demanded.  The  suggested  post- 
ponement has  reference  only  to  the  furnishing  of  gold  metal 
in  exchange  for  currency,  and  while  such  a  postponement 
might  affect  the  activity  of  workers  in  gold,  just  as  a  partial 
failure  of  the  cotton  crop  interferes  with  the  cotton  industry, 
the  business  activity  of  the  whole  community  could  not  pos- 
sibly suffer,  as  it  suffers  now  in  consequence  of  money  panics. 

If  our  currency  system  were  reformed  on  these  lines,  the 
question  of  the  ratio  of  the  gold  reserve  would  offer  no  diffi- 
culty. Since  banks  would  not  need  to  keep  gold  as  cash  reserve, 
the  demand  for  this  metal  would  be  so  greatly  reduced  that  a 
temporary  exhaustion  of  the  central  gold  reserve  would  be  but 
remotely  possible  (320),  even  were  the  legal  rate  of  gold 
reserve  reduced  to  but  a  small  fraction  of  the  present  require- 
ment, especially  as  the  only  natural  demand,  that  of  the  gold 
industry,  would  be  far  more  than  covered  by  the  current  out- 
put of  gold  from  the  mines.  It  is  quite  possible  that  a  gold 
reserve  of  only  one  per  cent,  of  the  amount  of  currency  issued 
would  ultimately  be  found  to  cover  fully  every  demand  made 
on  the  redemption  fimd  without  undue  strain  on  the  system 
of  its  replenishment  (303&). 

297.  Procuring  Gold  for  Redemption. — As  already  stated, 
the  gold  needed  for  redemption  is  to  be  furnished  by  the 
banks  through  whose  agency  the  notes  are  issued.  Whenever 
the  gold  in  the  redemption  fund  falls  below  the  amount  cor- 
responding to  the  legal  rate  of  gold  reserve,  the  deficit  would 
have  to  be  covered  by  the  banks  of  issue,  each  to  supply  the 
share  assessed  against  it  and  to  receive  in  exchange  for  this 
gold  an  equivalent  of  notes  from  the  redemption  fund.  The 
notification  to  furnish  gold  would  be  sent  to  the  banks  at 
stated  periods,  let  us  say,  monthly.  The  rate  of  assessment 
would  accordingly  be  computed  at  the  close  of  each  month, 
and  the  banks  be  required  to  supply  their  respective  amounts 
of  gold  within  the  succeeding  month.  Under  this  rule  the 
amount  of  gold  in  the  redemption  fund  would  never  be  much 
less  than  the  amount  prescribed  for  it,  unless,  indeed,  the 


297]  CURRENCY  REFORM  403 

demand  during  the  current  month  happens  to  be  extra- 
ordinarily large. 

Should  this  reserve  become  exhausted,  then  those  who 
would  next  apply  to  have  notes  redeemed,  that  is  to  say, 
those  who  would  want  to  buy  gold  from  the  reserve  fund, 
would  simply  have  to  await  their  turn  (320).  Some  assur- 
ance of  the  good  faith  of  those  applying  would  of  course  be 
necessary  to  preclude  an  abuse  of  the  system  by  speculators. 
If  at  the  end  of  any  month  there  were  still  a  deficiency,  the 
rate  of  gold  assessment  against  the  banks  for  the  following 
month  would  have  to  be  computed  to  meet  the  deficit  and 
also  to  restore  the  normal  ratio. 

A  frequent  recurrence  of  such  deficits  would  show  that  the 
adopted  ratio  of  reserve  is  too  low,  and  its  increase  would 
accordingly  be  indicated.  On  the  other  hand,  were  the  monthly 
demand  for  gold  never  to  exceed  a  small  fraction  of  this  fund, 
a  reduction  of  the  ratio  would  be  admissible. 

It  is,  of  course,  not  impossible  that  the  demand  for  gold 
may,  under  some  abnormal  condition,  rise  to  a  point  where  it 
would  be  impracticable  for  the  banks  to  meet  during  the  en- 
suing month  the  assessment  called  for  by  the  proposed  rule. 
In  view  of  this  contingency  the  law  might  be  made  to  provide 
that,  when  the  assessment  for  gold  in  any  one  month  were  to 
exceed,  say,  two  per  cent.,  the  time  allowed  for  the  banks  to 
turn  in  the  gold  shall  be  extended  for  a  limited  period  (303) . 

There  is  no  reason  to  fear  that  the  possibility  of  a  post- 
poned gold  redemption  would  be  a  source  of  weakness.  When 
considered  in  the  light  of  existing  conditions,  all  such  appre- 
hension will  be  found  groundless.  Under  the  present  system 
a  simultaneous  demand  on  all  banks  for  cash  amounting  to 
only  ten  per  cent,  of  their  deposits  would  exhaust  nearly  every 
bank  reserve  and  most  likely  precipitate  a  financial  crisis, 
while  under  the  system  here  outlined  a  similar  demand  for 
gold  in  exchange  for  currency  notes,  if  distributed  over  a  few 
months,  would  ])e  met  Avitli  liardly  any  effect  on  general  busi- 
ness conditions. 


404  CONCLUSIONS  [298 

298.  The  Communal  Agreement. — However  valid  and 
sound  may  be  the  credit  which  a  credit  instrument  represents, 
it  is  not  currency,  unless  it  is  brought  within  the  scope  of  that 
social  compact  through  which  it  becomes  accepted  in  the 
market  (85).  This  is  done  by  giving  the  credit  instrument 
the  legal  form  of  currency  notes.  Beyond  this,  a  well  grounded 
public  confidence  in  the  soundness  of  the  credit,  coupled  with 
assurance  of  redeemability,  is  all  that  is  economically  necessary 
to  give  the  notes  currency  as  money.  This  confidence  is  at 
present  imparted  through  the  governmental  control  of  the  issue 
and  custody  of  the  agents '  security ;  and,  indeed,  the  govern- 
ment is  the  only  authority  to  which  the  people  can  look  with 
entire  confidence  for  the  necessary  assurance. 

From  a  strictly  economic  standpoint  the  monetization  of 
valid  credit  is  a  very  simple  process.  Ever  since  credit  money 
has  come  into  use,  it  has  been  unhesitatingly  accepted  as  a 
medium  of  exchange,  whenever  its  security  was  regarded  as 
adequate,  its  redeemability  unquestioned  and  its  circulation 
legally  permitted.  As  a  matter  of  fact,  governments  have  had 
little  trouble  in  forcing  even  inadequately  secured  notes  into 
use  by  declaring  them  legal  tender,  and  such  currency  has 
continued  to  circulate  for  long  periods  of  time,  though  usually 
in  varying  degrees  of  depreciation.  These  facts  prove  that 
there  is  no  inherent  difficulty  in  the  way  of  converting  valid 
credit  into  valid  money.  Such  conversion,  however,  is  now 
regulated  by  laws  through  which  the  issue  of  currency  is 
restricted,  although  the  restriction  itself  cannot  be  justified  by 
sound  economic  considerations  (238-239). 

There  is  a  popular  notion  that  the  creation  of  money  is 
possible  only  through  some  mysterious  power  possessed  by 
government.  According  to  this  idea  nothing  can  be  money 
that  is  not  legal  tender.  This  opinion  has  no  foundation  in 
fact,  for  both  bank  notes  and  bank  checks  constantly  perform 
the  function  of  money.  It  is  not  the  government 's  ' '  fiat, ' '  but 
the  certainty  of  redemption,  that  prompts  the  common  eon- 
sent  to  accept  the  notes  in  the  market,  and  it  is  this  accept- 
ability that  gives  the  notes  their  money  quality.  An  author- 
itative control  of  currency  issues  is  indeed  desirable  for  several 
reasons,  but  it  is  not  indispensable. 


299.  300]  CURRENCY  REFORM  405 

But,  however  exercised,  this  control  shouki  not  go  beyond 
the  enforcement  of  such  regulations  as  are  necessary  to  make 
certain  of  the  security  and  to  assure  redemption.  It  should 
not  go  to  the  length  of  arbitrarily  limiting  or  in  any  other  way 
needlessly  hampering  the  issue  of  currencj'. 

299.  The  Process  of  Issuing  Currency. — The  process  of 
issuing  bank  currency  really  consists  of  three  successive  opera- 
tions. The  government,  having  manufactured  the  notes  which 
are  to  serve  as  money  tokens,  delivers  them  to  the  issuing  bank 
in  exchange  for  a  security  sufficient  to  guarantee  the  return 
of  the  notes  or  their  equivalent  to  the  government.  The  bank, 
in  due  course,  delivers  the  currency  notes  to  its  customers  in 
exchange  for  promissory  notes  or  other  security  through  which 
the  return  of  the  currency  or  its  equivalent  to  the  bank  is 
assured.  And,  finally,  the  customers  use  the  notes  as  a  medium 
of  exchange  in  purchasing  things  or  services.  Thereupon,  and 
not  until  then,  do  the  bank  notes  become  current  money. 

It  will  be  remembered  that  credit  is  ownership  of  wealth 
in  possession  of  the  debtor  (68),  just  as  a  debt  is  possession  of 
wealth  owned  by  the  creditor.  Considered  in  this  light,  the 
third  transaction  alone  constitutes  a  lending  of  actual  wealth, 
or  the  creation  of  a  real  credit  relation.  The  first  transaction, 
like  the  second,  is  merely  an  exchange  of  credit  instruments. 
Both  transactions  are  part  of  the  process  by  which  government 
exercises  control  over  the  issue  of  currency  and  is  put  in  posi- 
tion to  warrant  the  validity  of  the  notes.  The  first  transaction 
is  related  to  the  second  as  wholesaling  is  to  retailing.  Other- 
wise there  is  no  essential  dift'erence  between  the  two.  The  bank 
is  debtor  to  the  government  in  the  same  sense  in  which  the 
borrower  is  debtor  to  the  bank. 

300.  Money  Tokens. — A  money  token  is  simply  an  evi- 
dence of  debt  by  the  issuer,  emitted  in  a  form  which  is 
accepted  in  the  market  as  money  to  the  amount  betokened. 
The  material  of  which  money  tokens  are  made  must  not  be 
mistaken  for  the  substance  of  the  money  itself.  That  sub- 
stance consists  of  the  wealth  which  is  pledged  as  security  for 
the  issue,  and  this  is  true  even  of  standard  coin,  in  which  the 
security  is  borne  by  the  token  itself.    The  paper,  bronze,  nickel 


406  CONCLUSIONS  [301 

or  silver  of  which  money  tokens  other  than  standard  coin  are 
made  have  no  influence  on  the  value  of  the  money  as  such.  At 
the  same  time,  due  care  must  be  bestowed  on  the  preparation 
of  the  tokens,  so  that  they  may  be  properly  adapted  for  their 
function  as  currency.  The  notes  now  in  use  fully  meet  this 
requirement.  They  are  generally  given  such  form  as  to  be 
practically  safe  against  falsification,  and  in  their  usual  shape 
and  size  are  sufficiently  characteristic  to  be  readily  recognized 
as  money. 

For  various  reasons  it  is  desirable  that  the  tokens  De  pre- 
pared by  the  government,  or  at  least  under  its  supervision  and 
control,  and  that  the  government  guarantee  the  value  of  the 
security  (92).  In  this  way  the  issue  may  be  maintained  in 
uniformity,  and  abuses  in  the  issue  most  effectively  guarded 
against.  Moreover,  there  is  naturally  a  preference  for  guar- 
antee by  the  community  over  that  by  any  other  authority. 

301.  The  Cost  of  Issuing  Currency. — When  the  govern- 
ment undertakes  the  administration  of  the  currency  system, 
including  the  printing  of  the  notes  and  their  distribution  to 
the  agents  of  issue,  the  question  arises  whether  the  expense  of 
this  work  should  be  borne  by  the  state  or  be  collected  from  the 
issuers  through  the  agents  of  the  issue. 

In  the  illustration  of  the  hatter,  the  shoemaker  and  the 
grocer  (287)  we  assumed  that  the  hatter  became  the  issuer  of 
the  notes  through  which  the  exchanges  were  mediated.  Is  it 
just  to  make  him  pay  the  cost  of  the  issue?  The  three  men 
of  the  illustration  were  equally  benefited  by  this  method  of 
exchange,  hence  it  does  not  seem  right  to  expect  any  one  of 
them  to  bear  the  total  expense  of  the  system.  So  likewise,  in 
the  real  world,  the  benefit  of  the  currency  system  is  shared  by 
the  community  in  general.  There  is  every  reason  why  the 
cost  of  making  and  distributing  the  notes  and  of  replacing  the 
worn  ones  should  be  paid  by  the  people  as  a  whole,  that  is,  out 
of  the  public  treasury.  It  would  be  unjust  to  place  upon  a 
limited  number — represented  by  the  hatter  of  our  illustration 
— the  burden  of  this  cost  (310).  For  the  same  reason  it  is 
improper  that  banks  of  issue  should  be  taxed  to  meet  this 
expense.    Nor  would  any  other  tax  on  the  issue  of  notes  be 


302]  CURRENCY  REFORM  407 

justifiable,  just  as  neither  of  the  three  men  of  our  illustration 
should  be  mulcted  for  doing  that  which  benefits  all  alike  (303) . 

302.  Plan  of  Currency  Reform. — The  proposal  presented 
in  the  following  pages  is  worked  out  in  detail  merely  to  show 
that  on  the  general  principle  already  stated  a  practicable  plan 
can  be  elaborated.  It  is  quite  possible  that  some  experiences 
of  the  past  and  others  of  the  future  may  point  out  various 
modifications  as  regards  the  details,  and  even  different  ways 
of  reaching  the  same  end.  The  purpose  is  to  remove  those 
restrictions  on  the  utilization  of  credit  as  a  medium  of  exchange 
which  are  not  only  needless,  but  positively  harmful. 

A  currency  reform  with  this  end  in  view  may  be  effected 
without  any  disturbance  of  business  conditions  and  could  be 
realized  Avith  but  few  changes  in  the  details  of  the  present 
national  banking  system. 

The  principal  change  is  one  which  is  in  line  with  the  fre- 
quently proposed  issue  of  "asset  currency."  It  consists  essen- 
tially in  broadening  the  range  of  securities  acceptable  from 
the  agents  of  issue  by  the  treasury  as  a  basis  for  bank  notes. 
But  in  view  of  the  continuous  scrutiny  required  and  of  other 
complications  incident  to  the  use  of  ordinary  commercial  paper 
as  a  security  to  be  held  by  the  government  for  the  issue  of 
currency,  the  proposition  already  indicated  (288)  would  ap- 
pear to  be  decidedly  preferable. 

In  the  plan  here  proposed  the  "assets"  to  be  accepted  as 
a  basis  for  currency,  besides  national,  state  and  municipal 
bonds,  are  to  be  real  estate  liens,  of  which  there  is  undoubtedly 
an  ample  supply  obtainable  to  cover  every  possible  demand 
for  currency.  In  this  way  it  would  not  be  necessary  to  have 
recourse  to  ephemeral  business  paper  to  supply  that  security 
for  the  issue  which  is  placed  in  custody  of  the  government. 

Notes  so  issued  should  be  redeemable  in  gold  from  a  re- 
demption fund  in  custody  of  the  government.  It  may  suffice 
to  confine  the  offices  of  redemption  to  the  treasury  and  the 
sub-treasuries  of  the  United  States,  but  if  found  expedient, 
additional  branches  could  be  opened,  say,  in  the  principal  post 
offices.    As  under  this  system  the  coinage  of  gold  could  be  dis- 


408  CONCLUSIONS  [303 

continued,  a  demand  for  redemption  would  be  honored  only 
in  amounts  of,  say,  $100  and  multiples,  adapted  to  the  sizes  of 
the  bars  of  bullion  in  which  redemption  would  be  effected 
(294). 

Since  redemption  could  be  demanded  only  from  the  gov- 
ernment, banks  being  relieved  of  the  obligation  to  hand  out  the 
metal  over  their  counters  on  demand,  there  would  be  no  need  for 
distinguishing  the  notes  issued  through  one  bank  from  those 
issued  through  another,  hence  all  notes  of  equal  denomination 
could  be  made  alike  in  all  details.  This  would  not  only  simplify 
the  present  cumbersome  and  costly  method  of  issuing  special 
notes  to  each  bank,  but  would  also  facilitate  the  detection  of 
counterfeits,  if  such  came  into  circulation.  The  chief  object 
of  this  reform  being  the  removal  of  all  unnecessary  restrictions 
to  the  volume  of  currency  (291),  the  production  of  notes 
should  be  continued,  and  the  demand  for  notes  supplied,  so 
long  as  those  conditions  are  complied  with  which  would 
assure  that  every  note  issued  is  regularly  redeemable  in  the 
value  denominator.  Since  currency  can  be  used  only  for 
mediating  exchanges,  every  call  for  additional  currency  in- 
dicates that  there  is  further  need  for  means  of  exchange,  and 
every  refusal  to  issue  currency  in  response  to  such  call  is  a 
restraint  of  the  right  to  make  exchanges. 

These  notes  would  readily  take  the  place  of  all  forms  of 
currency  now  in  use,  with  the  exception  of  fractional  currency 
which,  in  its  present  form,  leaves  practically  nothing  to  be 
desired. 

The  banlvs  through  which  this  currency  is  to  be  issued 
would  use  it  as  they  now  employ  national  bank  notes.  By 
the  process  of  discounting  promissory  notes,  business  credits 
would,  as  now,  be  turned  into  bank  credit  and  made  available 
for  mediating  exchanges,  through  either  currency  or  checks. 
Such  amounts  of  notes  as  would  not  be  put  into  actual  circu- 
lation would  constitute  the  reserve. 

303.  Organization  of  Banks  of  Issue. — Whether  we  view 
a  bank  as  an  intermediary  agent  between  the  real  issuer  of 
currency  and  the  government  that  controls  the  issue  (102), 
or  as  the  retail  distributer  of  the  money  tokens  furnished  in 
gross  quantity  by  the  government,  its  function  is  that  of  con- 


303]  CURRENCY  REFORM  409 

verting  ordinary  credit  into  mone}-,  or,  as  it  may  be  termed, 
of  monetizing  or  mobilizing  credit. 

It  follows  that,  in  the  last  analysis,  the  raw  material  of 
banks  of  issue  is  not  money,  but  credit,  and  for  this  reason 
the  prerequisites  for  their  establishment  need  be  nothing 
more  than  valid  credit.  Upon  handing  the  instruments  of  this 
credit  to  the  government  as  security,  the  banks  would  obtain 
from  the  government  other  credit  instruments,  namely  cur- 
rency notes,  whereby  that  credit  would  be  monetized.  It  is 
therefore  quite  feasible  to  organize  banks  on  the  basis  of  stock 
issued,  not  against  cash,  but  against  certain  specified  forms  of 
credit,  such  as  bonds  of  the  federal,  state  and  perhaps  munici- 
pal governments,  and  recorded  real  estate  liens  (288),  which, 
in  turn,  are  to  be  accepted  by  the  government  as  security  for 
the  currency  issued  to  the  banks.  In  this  way  the  banks  would 
obtain  their  working  funds. 

Should  any  of  the  securities  furnished  by  a  bank  as  basis 
for  currency  depreciate  below  the  legally  prescribed  limit  of 
margin,  the  bank  would  be  required  to  make  good  the  shortage, 
either  by  furnishing  more  security,  or  by  reducing  its  issue. 

Inasmuch  as  it  is  conceivable  that  notwithstanding  all 
these  precautions  a  bank  may  become  insolvent  to  such  a 
degree  that  it  cannot  redeem  the  full  amount  of  the  currency 
issued  through  its  agency,  the  provision  should  be  made  that 
in  such  case  a  proportionate  tax  would  be  imposed  on  all  other 
banks  of  issue  to  cover  the  deficiency.  This  should  be  the 
only  tax  imposed  on  the  issue  of  currency,  apart  from  the 
obligations  of  furnishing  security  and  of  providing  and  main- 
taining the  redemption  fund  (301). 

The  gold  for  this  latter  fund  could  be  obtained  by  requir- 
ing every  bank  applying  for  currency  to  furnish  not  only  the 
prescribed  amount  of  securities,  but  also  gold  to  the  amount 
of  such  percentage  of  the  currency  issued  as  experience  in- 
dicated as  sufficient.  To  begin  with,  it  might  be  advisable  that 
a  rate  of  ten  or  fifteen  per  cent,  be  adopted,  this  rate  to  be 
afterwards  reduced  to  a  point  indicated  by  experience  as 
being  entirely  safe.  It  is  probable,  as  already  noted  {2dGh), 
that  a  rate  as  low  as  one  per  cent,  may  in  the  end  be  found  to 
be  fully  adequate. 


410  CONCLUSIONS  isos 

When  currency  notes  are  presented  for  redemption,  they 
would  be  turned  into  this  fund  in  exchange  for  gold  taken 
from  it.  While  this  fund  would  thus  remain  unimpaired,  its 
metal  portion  would  be  reduced,  and  in  order  to  restore  normal 
conditions,  monthly  assessments  would  be  made  on  all  banks 
of  issue  for  gold  in  exchange  for  the  notes  in  that  fund.  The 
comptroller  of  the  currency  might  be  empowered  to  replenish 
the  stock  of  gold  by  using  currency  from  the  redemption  fund 
for  the  purchase  of  gold  metal  in  the  market  at  a  price  not 
more  than  the  legal  rate — 23.22  grains  of  pure  gold  per  dollar 
— and  thus  avoid  the  necessity  of  calling  on  the  banks  for  it. 
Since  gold  would  no  longer  be  coined,  the  possessors  of  the 
metal  would  find  its  sale  to  the  treasury  a  means  of  converting 
it  into  money,  just  as  the  same  result  is  now  obtained  by  bring- 
ing the  gold  to  be  coined,  the  only  difference  being  that  the 
amount  so  converted  would  not  depend  on  the  supply  of  the 
metal,  but  on  the  demand  for  it  by  the  redemption  fund. 

Should  at  any  time  and  for  any  reason  the  redemption 
fund  become  entirely  depleted  of  gold,  applicants  for  the 
metal  would  simply  have  to  wait  for  the  stock  to  be  re- 
plenished (296o).  As  all  applicants  for  gold  in  redemption 
of  notes  would  get  the  metal  in  turn  as  fast  as  it  came  in 
from  the  sources  provided,  there  could  never  be  anything 
in  the  nature  of  an  actual  suspension  of  gold  redemption. 
The  delay  would  merely  take  the  fonn  of  a  time  of  grace.  If 
such  conditions  were  to  prevail  at  the  close  of  a  month,  the 
assessments  on  the  banks  of  issue  would  naturally  have  to 
cover  not  only  the  amount  awaiting  redemption,  but  also  an 
amount  restoring  the  redemption  fund  to  its  normal  status. 

In  view  of  the  possibility  that  the  demand  on  the  banks 
for  gold  in  any  one  month  may  be  more  than  the  banks  can 
supply  within  that  period  without  excessive  pressure  on  the 
market  for  that  metal,  provision  should  be  made  for  shifting 
at  least  a  part  of  the  assessments  on  the  succeeding  month 
or  months  (297). 

If  such  a  plan  were  universally  adopted,  there  would  be 
no  demand  for  gold  save  for  industrial  purposes.  That  de- 
mand would  readily  be  covered  by  the  new  gold  coming  into 
the  market,  and  it  would  therefore  be  out  of  reasonable  prob- 


304]  CURRENCY  REFORM  411 

ability  that  the  call  for  gold  upon  the  redemption  fund  would 
ever  amount  to  much  (320a).  The  likelihood  is  rather  that 
gold  would  always  be  freely  offered  in  the  market,  since  the 
metal  would  no  longer  be  admitted  to  coinage. 

But  supposing  the  plan  to  be  adopted  only  in  one  country, 
one  of  the  effects  would  doubtless  be  a  tendency  to  the  ex- 
portation of  gold  and  a  possible  demand  for  gold  in  re- 
demption of  notes  to  the  extent  of  exhausting  the  redemption 
fund  of  its  metal  reserve  (320&).  However,  since  a  delay  of 
gold  redemption  would  be  legally  admissible,  a  temporary 
exhaustion  of  the  gold  of  this  fund  could  not  of  itself  react 
upon  the  general  status  of  the  currency.  To  guard  against 
merely  speculative  or  wanton  calls  for  gold  in  exchange  for 
notes,  it  might  be  expedient  to  require  with  each  call  for  re- 
demption a  deposit  of,  say  five  or  ten  per  cent,  of  the  amount, 
this  deposit  to  be  forfeited  if  the  demand  is  not  made  effective 
when  the  supply  is  offered. 

The  reasons  above  adduced  for  reducing  the  gold  redemp- 
tion fund  to  a  small  percentage  of  the  currency  issue  do  not 
hold  good  as  regards  the  reserve  fund  of  banks.  Experience 
has  shown  that  banks  should  maintain  a  substantial  reserve 
fund  of  actual  currency,  and  there  are  good  reasons  why  this 
fund  should  not  be  less  than  about  15  per  cent,  of  the  deposit 
liabilities.  This  is  true  even  though  we  have  repeatedly 
pointed  out  that  the  requirement  of  a  large  reserve  fund  is 
objectionable,  in  so  far  as  the  expansion  of  bank  credit  is 
thereby  hampered,  making  it  often  impossible  for  banks,  es- 
pecially when  the  cycle  of  business  activity  reaches  the  hoard- 
ing stage  (273),  to  meet  all  demands  of  legitimate  business  for 
"money."  But  once  the  needless  limitations  on  the  issue  of 
currency  are  removed,  this  objection  falls  away. 

304.  Deposit  Insurance. — The  desirability  of  mutual  in- 
surance of  deposits  has  already  been  adverted  to  (290a).  An 
insurance  fund  may  be  created  by  requiring  all  banks  to  make 
a  deposit  equal  to,  say,  two  per  cent,  of  their  capital  and  sur- 
plus, and  to  maintain  that  proportion  as  their  capital  and 
surplus  is  increased  or  decreased. 

Assuming  that  a  bank  becomes  insolvent,  the  winding  up 
of  its  affairs  would  require  (1)  that  the  payment  of  the  checks 


412  CONCLUSIONS  [304 

of  depositors  be  continued  to  the  extent  of  their  balances, 
utilizing  for  this  purpose  the  available  assets  of  the  bank  and 
drawing  on  the  insurance  fund  for  such  additional  amount 
as  may  be  needed;  (2)  that,  also  by  drawing  on  the  insurance 
fund  as  may  be  necessary,  an  amount  of  currency  equal  to 
the  sum  issued  through  the  insolvent  bank  be  paid  to  the 
government  to  be  retired,  and  that  the  stock  securities  held 
by  the  government  be  thereupon  turned  over  to  the  receiver 
of  the  bank;  (3)  that  the  other  assets  of  the  bank  be  realized 
upon  as  promptly  as  possible.  From  these  collections  the 
insurance  fund  is  to  be  reimbursed  as  far  as  possible  for  the 
drafts  made  upon  it.  If  these  drafts  cannot  be  repaid  in  full 
from  the  collections,  the  deficit  is  to  be  charged  against  the 
stockholders'  securities  which  had  been  turned  over  to  the 
receiver,  and  assessed  on  the  stockholders  pro  rata.  In  the 
case  that  some  of  the  stockholders  fail  to  pay  that  assessment, 
the  amount  is  to  be  obtained  by  selling  their  respective  se- 
curities, the  balance,  if  any,  to  be  returned  to  them.  But  it 
may  happen  that  the  stockholders'  securities  are  inadequate 
to  cover  the  deficit  due  to  the  insurance  fund,  and  in  this  case 
the  remaining  deficit  is  to  be  made  up  by  assessment  on  all 
banks  in  proportion  to  the  sum  of  their  deposits  and  their 
currency  issue  (290c). 

The  following  additional  rule  should  in  justice  to  all  con- 
cerned become  a  part  of  the  plan  whenever  a  system  of  deposit 
insurance  is  adopted. 

It  is  clear  that  the  insurance  fund  cannot  lose  through 
the  failure  of  a  bank  unless  its  assets  fall  short  of  its  liabilities 
for  currency  issued  and  for  deposits.  The  stock  of  a  bank  and 
its  surplus,  if  there  be  any,  is  accordingly  the  margin  of  safety 
as  regards  a  possible  loss  to  the  insurance  fund  (104).  In 
fairness  to  all  banks  embraced  in  the  insurance  system,  this 
margin  of  safety  should  not  in  any  bank  be  less  than  a  certain 
proportion  of  the  total  liabilities.  It  would  be  advisable  to 
require  each  bank  to  deposit  in  the  insurance  fund  an  amount 
of  stockholders'  securities,  over  and  above  those  deposited  in 
the  treasury  for  currency  issued,  of  a  given  proportion,  say 
one- fourth,  of  the  deposit  liabilities,  to  be  utilized  as  receiver's 
assets  if  the  respective  bank  fails.    Each  bank  should  accord- 


305]  CURRENCY  REFORM  413 

ingly  be  required  to  increase  its  capital  stock  whenever  its 
deposit  liabilities  increase  beyond  the  proportionate  amount  of 
the  securities  already  furnished,  and  to  deposit  in  the  insurance 
fund  the  securities  on  which  the  new  stock  is  issued.  The 
stockholders  being  the  first  and  principal  losers  in  the  event 
of  a  failure  of  the  bank,  this  will  go  far  towards  putting  a  stop 
to  imprudent  and  unsound  banking. 

Bank  failures  of  the  past  with  attending  losses  to  de- 
positors prove  that  the  present  means  for  the  protection  of 
bank  credit  are  not  as  efficacious  as  they  should  be.  It  would 
therefore  seem  that  the  insurance  fund  would  frequently  be 
called  into  requisition.  But  it  should  be  remembered  that  the 
conditions  which  are  at  the  root  of  most  bank  failures — apart 
from  those  which  arise  through  sheer  mismanagement  or  crim- 
inality— would  undergo  a  wholesome  change  by  currency  re- 
form on  the  line  proposed.  From  the  moment  that  the  cause 
which  entails  an  endless  succession  of  business  failures  (255) 
is  removed,  the  risk  now  inherent  in  the  business  of  deposit 
banking  would  be  so  largely  reduced  that  bank  failures  due 
to  the  failures  of  customers  would  become  comparatively  rare. 
The  system  of  deposit  insurance  would  therefore  become  little 
more  than  a  formality. 

It  has  been  only  of  late  that  mutual  insurance  of  deposits 
has  been  put  in  practice  (2906).  This  has  been  done  in  some 
western  states  of  the  Union  under  provisions  of  law  making 
such  insurance  obligatory  on  state  banks.  But  the  enactments 
appear  to  have  been  formulated  without  proper  precaution 
against  loose  practices,  and  the  experiment  has  been  disap- 
pointing. The  system  is  nevertheless  likely  to  be  more  gen- 
erally introduced  after  experience  has  indicated  the  remedies 
for  such  defects  as  have  shown  themselves. 

305.  Missing  or  Lost  Notes. — Currency  notes,  when  in 
circulation,  are  liable  to  be  lost  or  destroyed,  and  it  may  be 
desirable  that  an  approximate  accounting  of  these  notes  be 
effected. 

This  could  be  done  by  periodically  changing  the  design, 
or  at  least  a  serial  letter  or  other  mark,  say  every  ten  or  twenty 
years,  and  as  worn  notes  are  returned  and  cancelled,  keep 


414  CONCLUSIONS  [306. 307 

account  of  their  series.  If  after  the  lapse  of  such  a  period  the 
notes  of  the  preceding  series  have  not  all  come  back  and  been 
cancelled,  it  may  be  assumed  that  the  notes  remaining  out 
have  been  lost.  An  amount  of  new  notes  equal  to  that  of  the 
supposedly  lost  notes  could  then  be  turned  into  the  national 
treasury,  and  if  subsequently  any  of  the  missing  notes  should 
be  received  for  cancellation,  they  would  be  exchanged  for 
other  notes  out  of  that  treasury  and  thereupon  cancelled. 

The  rationale  of  this  procedure  will  be  readily  understood. 
If  notes  are  accidentally  destroyed  or  lost,  the  amount  in 
existence  will  of  course  be  less  than  that  issued.  Since  for 
every  note  issued  there  is  a  corresponding  security  on  deposit 
with  the  government,  there  would  be  an  excess  of  the  debtors' 
over  the  creditors'  account  in  the  money  system.  In  the  way 
here  suggested  the  discrepancy  would  be  eliminated  and  the 
proper  balance  between  securities  covering  the  dehts  and  the 
actual  volume  of  currency,  the  credits,  could  be  maintained 
close  enovigh  for  all  practical  purposes. 

306.  The  Legal-tender  Quality. — The  question  arises  as 
to  whether  or  not  this  proposed  currency  should  be  made 
legal  tender.  In  the  ordinary  course  of  business  such  a 
provision  would  be  superfluous,  just  as  it  is  found  unnecessary 
as  regards  bank  checks  and  national  bank  notes.  Like  these, 
the  currency  here  proposed  would  naturally  circulate  on  its 
merits.  The  principal  function  of  the  banks  being  that  of 
monetizing  the  credit  of  their  customers,  the  means  of  that 
monetization,  the  currency  notes,  would  naturally  be  legal 
tender  as  between  them.  No  other  form  of  currency  outside 
of  minor  coin  being  in  use,  it  would  also,  of  course,  be  legal 
tender  for  all  debts,  public  or  private,  expressed  in  terms  of 
dollars.  While  it  would  thus  be  really  unnecessary,  there 
would,  on  the  other  hand,  be  no  objection  to  expressly  declar- 
ing the  notes  to  be  legal  tender  (99). 

307.  The  Function  of  Banks  of  Issue. — The  expediency 
of  issuing  the  stock  of  banking  institutions  against  securities 
and  liens  instead  of  money  may  appear  questionable.  Yet 
there  is  nothing  improper  or  unreasonable  in  it.  From  a 
purely  economic  standpoint  there  is  no  difference  of  value  be- 


808]  CURRENCY  REFORM  415 

tween  fully  assured  credit  and  money.  The  difference  is  of 
a  merely  conventional  nature,  and  being  due  exclusively  to 
statutory  enactment,  it  can  be  eliminated  by  statutory  pro- 
vision. The  subject  resolves  itself  into  a  question  of  dealing 
with  conventional  prejudices,  such  as  fell  away  when  the 
public  became  educated  to  the  use  of  bank  notes  and  checks  in 
lieu  of  specie.  As  a  matter  of  fact,  checks  constitute  a  money 
system  based  on  business  credits  and  are,  in  a  sense,  a  proto- 
type of  the  currency  notes  here  proposed.  There  is  absolutely 
no  reason  why  this  currency  should  be  any  less  effective  for 
the  purpose  of  mediating  exchanges  than  the  national  bank 
notes  of  the  present  banking  system. 

As  already  stated,  banks  of  issue  perform  the  function  of 
distributing  the  currency  into  its  proper  channels,  or,  looking 
at  it  in  another  way,  of  mediating  the  monetization  of  hiisi- 
ness  credits.  The  examination  and  insurance  of  the  securities 
representing  these  credits  are  the  proper  function  of  the  local 
banks,  Avliich  would  monetize  those  credits  as  they  do  now, 
by  discounting  promissory  notes  and  other  credit  instruments. 

Banking  institutions  would  also  continue  to  perform  that 
function  of  modern  banks  which  consists  in  effecting  the 
clearance  of  business  accounts  by  check.  But  since  the  dis- 
counts from  loans  would  no  longer  suffice  to  cover  the  clerical 
expenses  of  this  work,  the  banks  would  have  to  look  for  an 
income  from  those  to  whom  they  render  this  service.  This  in- 
come could  be  obtained  by  the  banks  charging  a  certain  amount 
for  each  check  made  out  by  a  depositor  and  passed  back  to 
him  through  the  bank.  Business  men  would  then  be  paying 
directly  for  the  labor  involved  in  mediating  their  payments 
instead  of  indirectly,  as  under  the  present  system. 

308.  Summary. — The  principal  aim  of  the  currency  system 
here  proposed  is  the  removal  of  that  impediment  which  now 
prevents  the  volume  of  currency  from  adapting  itself  to  the 
effective  demand  for  money.  This  means  a  complete  reversal 
of  the  prevailing  policy  of  finance  which  has  grown  up  on 
the  fallacious  theory  that  the  value  of  the  "money  unit"  de- 
pends on  the  volume  of  money,  and  that  therefore  every  in- 
crease of  the  volume  is  attended  by  a  corresponding  increase 


416  CONCLUSIONS  [309 

of  the  price  level,  and  vice  versa.  Imbued  with  this  theory, 
John  Stuart  Mill  (239)  and  others  of  that  school  came  to 
believe  that  everj'  permanent  increase  of  currency  results  in  a 
loss  to  the  holders  of  existing  notes  and  a  corresponding  gain 
to  the  issuers  of  the  new  notes.  This  misconception  still 
remains  an  obstacle  to  the  institution  of  a  rational  reform  of 
the  currency. 

The  present  proposition  is  based  on  the  self-evident  fact 
that  currency  notes  redeemable  in  gold  have  the  same  value 
as  the  gold  in  which  they  are  redeemable.  Being  freed  from 
arbitrary  restrictions,  the  volume  of  currency  would  automat- 
ically adjust  itself  to  the  requirements  of  commerce,  expand- 
ing and  contracting  where  and  when  the  demands  of  business 
dictate.  Currency  notes  issued  under  the  proposed  rules 
would  possess  all  the  various  requisites  of  a  perfect  medium 
of  exchange.  They  would  be  fully  secured  and,  being  redeem- 
able in  gold,  would  be  on  a  par  with  gold. 

Notwithstanding  the  increased  currency  issue,  there  would 
be  no  danger  of  a  shortage  of  gold  for  purposes  of  redemption. 
The  demand  for  the  metal  would  no  longer  include  a  demand 
for  banking  puiTioses  and  would  subside  to  the  level  of  its 
industrial  requirements.  The  demand  for  its  use  as  currency 
and  bank  reserve  being  practically  done  away  with,  the  gold 
now  locked  up  in  treasuries  for  redemption  purposes,  and  in 
bank  vaults  as  reserve,  would,  at  least  in  part,  find  its  way 
into  the  market  as  metal,  so  that  the  supply  of  gold  to  meet 
all  market  demands  for  the  metal  would  never  fall  short.  It 
is  only  because  consideration  should  always  be  given  to  every 
possible  contingency,  however  remote,  that  some  provision, 
as  already  suggested  (296-297),  should  be  made  to  meet  a 
possible  temporary  exhaustion  of  the  redemption  fund,  though 
such  an  exhaustion  under  the  proposed  system  is  almost  in- 
conceivable. 

309.  A  Credit  Clearance  System. — Herbert  Spencer  has 
pointed  out  that  legislation  generally  follows  rather  than  leads 
in  the  march  of  progress.  Legislators  are  presumed  to  repre- 
sent their  electorate  and  therefore  rarely   feel  justified   in 


309]  CURRENCY  REFORM  417 

advocating  a  reform  which  has  not  the  sanction  of  a  prevailing 
public  opinion. 

The  volume  theory  of  the  value  of  money  having  long 
been  preached  by  economists  of  standing  and  reputation,  and 
taken  as  the  kejaiote  of  currency  legislation,  there  may  be 
need  of  some  practical  demonstration  of  the  fallacy  of  the  old 
idea  and  of  the  validity  of  the  proposition  on  which  alone  an 
effective  refonn  of  the  currency  can  be  based. 

Were  a  number  of  business  men  to  combine  for  the  purpose 
of  organizing  a  system  of  exchange,  effective  among  them- 
selves, they  could  clearly  demonstrate  how  simple  the  money 
system  can  really  be  made.  The  greater  the  number  of  busi- 
ness men  that  would  thus  co-operate,  the  more  complete  would 
be  their  own  emancipation  from  the  obstruction  to  commerce 
and  industry  which  existing  currency  laws  impose. 

A  practicable  plan  for  employing  any  sound  business  credit 
as  a  medium  of  exchange  may  be  outlined  as  follows : 

For  the  purpose  of  settling  business  accounts  through  a 
system  of  mutual  clearance,  societies  of  business  men  can  be 
formed  in  their  respective  localities,  and  these  bodies  federated 
in  a  larger  organization.  The  method  of  clearing  accounts 
among  members  of  these  societies  need  differ  in  but  a  few 
details  from  the  method  at  present  employed  by  deposit  banks 
for  clearing  checks.  Each  society  would  open  an  account  with 
every  one  of  its  members,  and  any  member  desiring  to  use  his 
oAvn  credit  as  a  medium  of  exchange  would,  first  of  all,  furnish 
thoroughly  acceptable  and  amply  adequate  security  for  the 
amount  of  credit  he  desires  to  have  mobilized. 

Neither  the  amount  of  this  security  nor  any  part  of  it  is  to 
be  credited  to  the  account  of  the  respective  member,  but  is  to 
be  held  by  the  society  as  a  pledge  to  cover  "credit  cheeks" 
which  he  is  to  be  entitled  to  draw  on  the  society  in  excess  of 
any  deposits  that  he  may  make  to  the  credit  of  his  account. 

Even  though  he  makes  no  deposit  of  funds  of  any  kind,  but 
ha.s  furnished  only  the  security  above  indicated,  he  is  to  be 
entitled  to  draw,  within  the  limit  of  the  amount  for  which  his 
security  has  been  accepted,  credit  checks  which  would  be  sub- 
stantially of  the  following  form  and  tenor: 
27 


418  CONCLUSIONS  [809 

The  Credit  Cleauinq  Society  of 

Credit John  Smith or   order   with 

One    Hundred Dollars. 

and  charge  to  the  Account  of 

William  Brown. 

Such  checks  would  be  accepted  by  all  members  of  the 
federated  societies  in  payment  of  business  accounts,  and  when 
deposited,  would  be  duly  credited  to  the  depositors'  and 
charged  to  the  drawers'  account. 

Besides  credit  checks,  bankable  funds,  such  as  bank  notes 
and  bank  checks,  are  to  be  accepted  for  deposit,  but  when  so  de- 
posited, the  checks  drawn  against  the  account  are  to  be  only 
in  the  form  of  credit  checks  of  the  above  description,  to  be 
used  by  the  drawer  in  paying  accounts  due  by  him  to  other 
members  of  any  of  the  federated  societies. 

Since  all  business  men  have  upon  their  books  both  accounts 
payable  and  accounts  receivable,  a  clearance  of  the  greater 
part,  if  not  all,  of  this  mutual  indebtedness  could  readily  be 
achieved  by  an  extended  application  of  this  method.  It  is 
only  necessary  to  follow  the  customary  method  of  clearing 
bank  checks. 

A  brief  illustration  may  conduce  to  a  better  understanding 
of  the  idea.  A  depositor,  after  furnishing  acceptable  security 
adequate  to  cover  the  credit  he  purposes  to  use,  might  during 
the  first  month  pay  out  credit  checks  to  the  amount  of,  say, 
$3000,  and  receive  in  payment,  in  the  course  of  business,  a 
number  of  similar  checks  to  the  amount  of  $2500,  which  he 
deposits  at  his  society.  At  the  end  of  the  month  his  account 
would  be  overdrawn  to  the  amount  of  $500.  He  would  have 
drawn  against  his  security  to  that  extent,  and  thus,  for  the 
time  being,  be  debtor  for  that  amount  to  his  society,  and  in- 
cidentally to  the  entire  clearance  system. 

During  the  succeeding  month  he  might  send  out  checks  to 
the  amount  of  $3500  and  receive  $4200  in  the  form  of  similar 
checks  from  his  customers.  On  depositing  these,  he  would 
have  a  balance  of  $200  in  his  favor  and  thus  be  a  creditor  of 
this  clearing  system.  If  the  bulk  of  his  business  had  been 
transacted  with  members  of  the  federated  societies  who  had 


310]  CURRENCY  REFORM  419 

given  and  received  such  checks  in  payment,  he  would  have 
needed  in  his  business  but  little  cash  and  would  have  been 
to  that  extent  independent  of  the  money  market. 

It  is  manifest  that  under  these  rules  a  member  could  check 
out  more  than  he  deposits  and  thus  become  debtor  of  the 
clearing  system,  but  this  only  up  to  the  amount  for  which  the 
security  he  furnished  had  been  accepted.  His  credit  is 
monetized  or  "mobilized"  through  the  over-drafts  of  his 
account  with  the  society,  and  to  that  extent  addition  has  been 
made  to  the  exchange  medium  of  this  system.  As  issuer  of 
this  additional  exchange  medium  he  became  to  that  extent 
a  debtor  to  the  system.  Upon  subsequently  reducing  his  in- 
debtedness by  the  deposit  of  credit  checks  received  from  other 
members,  or  of  current  funds,  he  correspondingly  reduces  the 
volume  of  his  own  mobilized  credit  and  incidentally  his  in- 
debtedness to  the  system.  A  member  depositing  more  credit 
checks  than  he  has  issued  has  evidently  made  no  draft  against 
any  security  he  may  have  furnished  and  is,  in  fact,  a  creditor 
of  the  clearance  system  to  the  extent  of  his  balance. 

The  total  volume  of  this  medium  of  exchange,  that  is  to 
say,  of  the  credit  so  mobilized,  would  automatically  adapt 
itself  to  the  business  requirements  of  its  members.  It  would 
expand  whenever  a  member  overdraws  his  account — within 
the  limits  of  his  security,  of  course — and  it  would  contract 
whenever  an  indebted  member  reduces  his  indebtedness  by 
deposits. 

It  is  obvious  that  such  a  system  could  easily  be  inaugurated 
with  but  a  few  provisions  for  its  maintenance  and  to  guard 
against  abuse. 

310.  Ways  and  Means  of  the  System. — The  cost  of  con- 
ducting such  a  business  would  be  mainly  that  of  the  services 
of  its  employes  and  of  such  incidentals  as  are  requisite  to  the 
conduct  of  the  basiness.  Another  item  to  be  considered  would 
be  the  possible  losses  through  exceptional  depreciation  of 
some  of  the  securities.  To  cover  these  requirements,  monthly 
assessments  would  be  made  on  the  members  of  the  association 
which,  at  least  at  the  beginning,  should  be  proportionate  to 
the  amount  of  their  indebtedness  to  the  society,  in  other  words, 


420  CONCLUSIONS  [3ii 

in  proportion  to  the  extent  to  which  their  individual  credit  has 
been  monetized  for  them  by  the  association.^ ^^ 

The  rate  of  these  assessments  should  at  first  be  rather  in 
excess  of  the  estimated  requirement,  with  a  view  of  gradu- 
ally accumulating  a  reasonable  surplus  fund  in  preparation 
for  contingencies.  This  rate  should  be  revised  from  time  to 
time  so  as  to  adjust  the  income  to  the  necessary  outgo.  Inas- 
much as  the  object  of  the  societies  would  be  the  facilitating 
of  exchanges  and  not  the  making  of  profits,  it  would  naturally 
be  undesirable  as  well  as  unnecessary  to  accumulate  more  than 
a  limited  surplus  fund. 

Inasmuch  as  the  assessments  on  the  debtors  of  each  society 
are  to  be  adjusted  to  cover  not  only  necessary  expenses,  but  also 
any  losses  arising  through  exceptional  depreciation  of  pledged 
securities,  it  follows  that  each  society  would  be  incidentally 
a  mutual  credit  insurance  company.  The  solidarity  of  respon- 
sibility thus  effected  would  maintain  the  credit  of  the  societies 
upon  the  highest  plane  at  all  times. 

The  various  local  associations  would  naturally  accept  all 
credit  checks  issued  by  members  of  any  of  the  federated  so- 
cieties and  W'Ould  clear  them  as  checks  are  cleared  by  deposit 
banks.  Unauthorized  credit  checks,  or  checks  exceeding  the 
credit  of  the  drawer  w^ould,  of  course,  be  treated  as  unauthor- 
ized bank  checks  and  overdrafts  are  now  treated  by  deposit 
banks. 

311.  Payment  of  Individual  Balances. — In  the  practical 
working  of  a  system  such  as  here  proposed,  the  process  of 
clearance  cannot  be  expected  to  work  out  to  exact  balances. 
Some  members  will  receive  a  larger  amount  in  credit  checks 
than  they  can  use  in  pajnnents  to  their  fellow  members,  and 
their  credit  balances  will  correspondingly  increase.  Others 
will  pay  out  more  credit  checks  than  they  receive  and  accord- 

'**°ln  the  light  of  former  conclusions  (301)  it  would  appear  im- 
proper that  the  cost  of  conducting  the  business  should  be  borne  by 
those  alone  who  are  drawing  upon  their  credit  in  the  operation  of  the 
system,  inasmuch  as  those  who,  for  the  time  being,  are  not  using  their 
own  credit,  are  getting  the  benefit  of  the  clearance  system  as  well  as 
the  others.  But  so  long  as  bank  depositors  generally  get  their  checks 
cleared  without  cost  to  them,  those  members  of  the  clearance  system 
who  would  have  no  occasion  to  have  their  own  credit  monetized  should 
be  given  the  same  advantage. 


312]  CURRENCY  REFORM  421 

ingly  have  au  increased  debtor  balance.  To  adjust  these 
differences,  some  such  means  as  the  following  would  be 
required. 

The  creditor  members,  namely,  those  whose  deposits  of 
credit  checks  exceed  their  drafts,  must  be  entitled  to  obtain 
cash  from  the  society  to  the  extent  of  their  credit  balances. 
The  cash  necessary  for  this  purpose  has  naturally  to  be  looked 
for  from  those  who  issued  more  credit  checks  than  they  de- 
posited and  who,  through  the  monetization  of  their  credit, 
have  become  debtors  to  the  system.  In  order  that  this  cash 
may  come  in  systematically,  the  debtors  would  be  required  to 
deposit,  Avithiu  stated  intervals,  say  monthly,  a  certain  amount 
of  cash  proportionate  to  the  amount  of  their  overdrafts.  Thus 
a  member  whose  debtor  balance  at  the  end  of  a  month  amounts 
to,  say,  $2000,  when  the  monthly  assessment  of  cash  required 
to  meet  the  calls  for  payment  of  credit  balances  is  twenty 
per  cent.,  would  have  to  deposit  at  least  $400  in  cash  during 
the  ensuing  month. 

These  cash  deposits  would  virtually  constitute  instalment 
payments  of  the  indebtedness  incurred,  but  this  indebtedness 
could  of  course  be  renewed  through  a  further  issue  of  credit 
checks  within  the  credit  limit  of  the  issuer.  The  rate  of  assess- 
ment, or  "cash  rate,"  would  be  adjiLsted  from  time  to  time  to 
correspond  with  the  demand  for  cash  payment  of  credit  bal- 
ances. But  while  this  rate  may  readily  be  adjusted  so  that 
in  the  average  the  amount  of  cash  received  meets  the  calls  for 
payment  of  balances,  these  receipts  might  at  times  become 
inadequate,  and  this  contingency  must  also  be  provided  for. 

312.  Deferred  Payments. — In  case  that  demands  for  cash 
payments  of  credit  balances  surpass  the  amount  of  cash  on 
hand,  a  temporary  postponement  of  the  payments  can  be 
provided  for  in  a  way  similar  to  that  suggested  in  the  case  of 
gold  redemption  (296-297).  Accordingly,  a  member  who  de- 
posits a  larger  amount  of  checks  than  he  pays  out  in  the  course 
of  his  business  and  who  desires  his  credit  balance,  or  a  portion 
of  it,  paid  in  cash,  might  have  to  wait  some  days  after  enter- 
ing his  demand,  before  it  could  be  met.  In  such  an  event  the 
monthly  call  on  debtors  for  cash,  that  is,  the  "cash  rate," 
would  be  increased  to  a  point  which  would  adjust  the  cash 
income  to  the  recjuired  amount,  and  so  enable  a  resumption 


422  CONCLUSIONS  [312 

of  balance  payments  on  demand.  But,  on  the  other  hand,  the 
debtors  should  be  protected  against  an  unexpectedly  hea\'y 
demand  for  cash.  If  the  rule  were  made  that  the  monthly 
cash  rate  shall  never  exceed  50  per  cent,  of  the  debt  balance, 
the  delay  of  payment,  in  the  event  of  a  simultaneous  presenta- 
tion of  all  outstanding  credits,  would  amount  to  somewhat 
over  two  months.  A  limit  of,  say,  three  months  for  the 
maximum  delay  of  balance  payments  could  be  adopted  to 
surely  cover  the  theoretically  most  unfavorable  case,  a  case 
corresponding  in  the  present  banking  system  with  a  simul- 
taneous demand  for  withdrawal  of  all  deposits,  which,  as  is 
well  known,  could  never  be  met,  and  is  never  taken  into 
account  as  even  a  possibility. 

Members  having  credit  balances  would,  accordingly,  have 
the  right  to  demand  payment  of  those  balances,  with  the 
understanding  that,  if  need  be,  the  society  may  avail  itself 
of  a  period  of  grace  never  exceeding  three  months.  In  prac- 
tice such  occasion  would  rarely,  if  ever,  arise,  and  if  it  did, 
the  delay  would  probably  never  exceed  one  or  two  weeks,  ex- 
cept, perhaps,  during  the  initial  stage  of  the  organization. 
Those  accepting  payment  in  credit  checks  would,  of  course, 
do  so  with  a  full  knowledge  of  this  provision. 

Such  possible  delays  in  the  payment  of  credit  balances 
may  appear,  at  first  sight,  to  be  a  serious  objection  to  such  a 
system.  But  upon  further  consideration  it  will  be  found  to 
be  of  trifling  consequence,  as  compared  with  the  conditions 
now  actually  prevalent  in  business.  Members  accepting  credit 
checks  would,  as  a  rule,  be  able  to  use  the  credit  they  represent 
for  paying  some  of  their  accounts,  and  only  exceptionally 
would  they  require  their  balances  exchanged  for  currency. 
Moreover,  once  the  system  is  more  or  less  extensively  adopted, 
any  delay  in  balance  payment  that  might  arise  would  seldom 
exceed  a  week,  and  as  it  would  be  perfectly  reasonable  for 
members  to  insist  on  payment  of  their  invoices  within  ten 
days  of  their  date  if  paid  by  credit  checks  (340),  and  equally 
feasible  for  debtors  to  pay  by  credit  checks  within  that  time, 
this  period,  added  to  the  possible  delay  of  balance  payment, 
would  probably  never  exceed  one  month,  a  time  which  is  now 
customary  in  business  generally.    Anyway,  the  likelihood  of 


313. 314]  CURRENCY  REFORM  423 

such  delay  would  fall  away  entirely  soon  after  the  system  was 
fairly  in  operation. 

313.  Issue  of  Notes. — Nor  can  there  be  any  objection  to 
broadening  the  scope  of  the  system  by  having  the  federated 
associations  issue  notes  for  circulation  among  the  members, 
thus  taking  the  place  of  currency.  These  notes  would  be 
issued  to  any  member  in  exchange  for  credit  checks  at  the 
ofiBce  where  he  deposits,  and  if  presented  for  redemption  by  a 
creditor  member  of  any  of  the  societies,  at  the  place  where  he 
is  a  depositor,  would  be  redeemable  in  actual  currency  on  the 
same  conditions  on  which  credit  balances  are  cashed. 

Inasmuch  as  redemption  could  be  demanded,  not  by  any 
bearer  of  the  notes,  but  only  by  a  member  who  is  himself  at  once 
a  depositor  and  a  creditor  of  the  system,  and  furthermore,  inas- 
much as  redemption  would  not  be  specifically  promised  on 
demand,  but  be  subject  to  certain  limitation  as  to  time,  these 
notes  would  not  be  money  in  the  legal  sense  of  the  term  and 
would  therefore  not  be  subject  to  the  present  prohibitory  tax, 
but  w^ould  nevertheless  serve  all  the  purposes  of  a  medium  of 
exchange  within  the  circle  of  the  association  membership. 

In  order  that  the  field  in  which  these  notes  can  be  utilized 
may  be  still  further  enlarged,  the  various  societies  might 
accept  non-depositors  as  "associate  members"  on  a  stated 
initiation  fee.  These  associate  members  Avould  then  be  in  a 
position  to  accept  such  notes  and  pass  them  to  other  members, 
although  they  could  not  have  them  redeemed,  except  through 
a  regular  creditor  member.  In  this  way  even  wage  earners 
could  use  these  notes.  This  would  materially  increase  the 
chance  of  cancellation  of  accounts  and  would  correspondingly 
decrease  the  need  for  cash  for  the  clearance  of  credit  balances. 

314.  Advantages  of  the  System. — While  the  system  of 
clearing  accounts  here  proposed  would  reach  its  fullest  effi- 
ciency only  when  employed  by  the  business  world  in  general, 
it  yet  could  easily  be  inaugurated  with  advantage  through  the 
co-operation  of  a  comparatively  small  number  of  business 
houses.  Such  an  institution,  when  once  in  operation,  would 
afford  advantages  to  its  members  which  would  sooner  or 
later  induce  all  progressive  business  men  to  join.  The  ad- 
vantages in  question  may  be  briefly  recapitulated. 


424  CONCLUSIONS  [314 

The  most  obvious  benefit  would  be  the  greater  facility 
afforded  for  the  settlement  of  business  accounts.  Through 
the  medium  of  the  institution  the  credit  of  the  individual 
business  man  could  be  utilized  as  though  it  were  money,  so 
far  at  least  as  relates  to  dealings  with  members  of  the  affiliated 
societies,  and  no  arbitrary  regulation  could  put  a  limit  to  this 
use  of  credit.  And  yet  an  undue  expansion  of  this  medium 
of  exchange  could  not  occur,  as  its  volume  would  depend  on 
the  willingness  and  consent  of  creditor  members  to  carry  bal- 
ances. Whenever  the  balance  of  a  creditor  member  of  any 
of  the  societies  exceeds  the  amount  he  can  use  in  his  business, 
he  would  naturally  have  the  excess  redeemed  in  currency.  In 
this  way  debtor  members  would  be  brought  to  reduce  their 
indebtedness  by  cash  deposits.  The  volume  of  this  medium  of 
exchange  would  thus  automatically  adapt  itself  to  the  needs 
of  business. 

The  system  would,  of  course,  not  be  free  from  all  cost  to 
the  participants.  It  would  cost  something  to  keep  the  or- 
ganization going,  and,  as  has  been  shown  before,  this  cost 
would  be  collected  in  the  form  of  charges  against  the  debtor 
members.  But  though  these  charges  would  be  analogous  to 
interest,  their  amount  would  be  below  the  current  interest 
rate,  at  least  to  the  extent  of  the  item  of  pure  interest  now 
paid  as  part  of  the  charge  for  current  interest  or  discount. 

Other  advantages  would  follow  incidentally.  Under  such 
a  system  of  clearance  prompt  payment  of  accounts  by  credit 
checks  could  reasonably  be  demanded  by  every  member  from 
every  other  (340).  Any  delay  in  such  payment  would  be  an 
acknowledgment  of  lack  of  resources,  and  being  thus  virtually 
an  admission  of  financial  weakness,  would  be  a  warning  against 
a  further  extension  of  credit  to  the  delinquent.  Questionable 
debts  would  not  accumulate ;  the  current  custom  of  extending 
credits  on  the  basis  of  supposed  assets  would  cease,  and  the 
present  method  of  settling  accounts  with  promissory  notes, 
when  the  amount  of  such  notes  already  afloat  is  known  only 
to  the  maker,  would  become  obsolete.  The  conduct  of  business 
with  an  excessive  proportion  of  liabilities  would  become  almost 
impossible,  and  disastrous  business  failures,  which  are  the  con- 
sequences of  excessive  liabilities,  would  be  correspondingly  re- 
duced. 


CHAPTER  XVII 

EFFECTS  OF  CURRENCY  REFORM 

315.  Direct  Results. — The  currency  system  proposed  in 
the  foregoing  chapter  cannot  be  said  to  be  a  radical  departure 
from  well  established  principles.  There  is  not  a  single  feature 
among  the  proposed  details  that  has  not  in  some  way  or  other 
stood  the  test  of  time.  Under  this  system  every  currency 
note  would  remain,  as  it  is  now,  an  acknowledgment  of  debt, 
doubly  secured.  The  gold  standard  would  continue  to  be 
maintained  through  redeemability  of  the  notes  in  gold  (292- 
297).  The  use  of  bullion  instead  of  specie  as  money  is  even 
now  the  current  practice  in  international  settlements  (85). 
A  temporary  delay  in  gold  redemption  in  case  of  emergency  is 
nothing  new,  and  past  experience  has  proved  it  to  have  no 
influence  on  the  value  of  the  notes  if  the  postponement  is  not 
of  an  indefinite  period  (296).  The  purpose  of  the  proposed 
reform  is  the  removal  of  that  obstruction  to  the  freedom  of 
exchange  which  is  being  maintained  because  of  the  fear  of  an 
imaginary  danger  (239-240). 

The  proposed  alternative  in  the  foiTa  of  a  system  of  mutual 
clearance  of  commercial  accounts  differs  from  the  present 
bank  check  system  only  in  a  few  details  and,  regarded  from  a 
simply  economic  standpoint,  the  differences  are  merely  in 
degree.  The  principal  change  is  that  of  materially  reducing 
the  proportion  of  the  reserve  fund  of  legal  money,  made  feas- 
ible by  the  provision  for  a  brief  postponement,  in  case  of 
emergency,  of  the  exchange  of  legal  money  for  credit  checks. 

But  as  regards  the  effect  which  the  proposed  currency 
reform  would  doubtless  have  upon  the  industrial  w^orld,  and 
upon  society  generally,  far-reaching  changes  for  the  better 
would  certainly  follow.  When  the  supply  of  currency  is 
allowed  freely  to  respond  to  every  demand  that  is  supported 
by  the  tender  of  adequate  security,  and  the  issue  is  not  ham- 
pered by  a  needless  tax,  competition  among  lenders  will  bring 

425 


426  CONCLUSIONS  [316 

about  a  reduction  of  the  interest  rate  to  a  point  where  this 
rate  will  cover  only  the  value  of  actual  services  rendered.  The 
item  of  pure  interest  will  be  practically  eliminated  from  gross 
interest  (327),  as  a  natural  consequence  of  the  freedom  of 
competition  and  the  doing  away  with  the  impersonal  monopoly 
of  money.  This  condition  would  be  realized  as  rapidly  as 
the  currency  reform  is  put  in  operation  and  the  additional 
currency  brought  into  circulation.  The  beneficial  effects  that 
such  a  change  would  bring  about  in  the  general  constitution 
of  society  can  scarcely  be  estimated,  but  a  few  of  the  more 
salient  results  may  be  fairly  prognosticated. 

316.  Indirect  Results. — When  once  money  has  lost  its 
power  to  command  pure  interest,  possessors  of  money  or  of 
credit  capable  of  being  monetized  will  naturally  seek  to  invest 
their  means  in  such  industrial  and  commercial  pursuits  as 
still  afford  capital  interest.  These  investments  would  take 
the  form  not  only  of  enlargement  of  existing  establishments, 
the  starting  of  new  enterprises  and  the  full  employment  of  all 
available  labor,  but  also  of  such  improvements  in  the  methods 
of  production  as  will  enable  labor  to  achieve  its  maximum 
efficiency.  In  consequence  of  that  increase  of  capital  by  which 
the  efficiency  of  labor  is  enhanced,  the  final  efficiency  of 
capital,  and  hence  also  its  power  to  command  an  unearned 
income,  will  become  lessened  (195). 

These  investments  would  naturally  continue  until  the 
diminishing  capital  returns  cease  to  offer  sufficient  induce- 
ments for  the  further  monetization  of  credit  and  its  invest- 
ment in  business.  At  what  point  will  this  be  the  case  ?  When, 
as  we  have  heretofore  found,  the  current  rate  of  pure  interest 
on  money  loans  equals,  say,  C'e',  Fig.  18,  the  amount  of  capital 
an  employer  can  use  to  his  best  advantage  is  no  greater  than 
OC,  and  the  amount  of  goods  produced  by  a  given  amount 
of  labor  is  represented  by  the  area  OC'e'E.  But  when  the  item 
of  pure  interest  on  money  loans  falls  to  a  nominal  rate,  there 
need  be  no  stint  in  the  employment  of  capital  goods,  and  the 
amount  of  capital  that  can  be  most  advantageously  employed 
will  be  increased  to  the  point  at  which  labor  attains  its  maxi- 
mum efficiency,  the  point  indicated  at  C  in  the  diagram,  the 


316]  EFFECTS  OF  CURRENCY  REFORM  427 

productivity  being  represented  by  the  area  OCE.  At  the  same 
time,  the  final  efficiency  of  capital,  and  accordingly  also  the 
rate  of  unearned  returns  of  capital,  finds  its  natural  level 
at,  or  at  least  near,  the  vanishing  point  C. 

If  the  prevailing  theories  regarding  interest  were  correct, 
this  result  would  not  obtain.  According  to  these  theories 
man  is  naturally  averse  to  producing  things  in  advance  of  his 
requirements.  It  is  immaterial  whether  this  aversion  is  ex- 
plained by  regarding  "abstinence"  or  "waiting"  as  an  irksome 
effort,  or  by  assuming  that  the  strain  of  future  productive 
effort  is  underestimated.  This  aversion,  if  it  were  as  potent 
an  economic  factor  as  is  assumed  by  these  theories,  would  in- 
deed account  for  that  insufficiency  of  capital  which  makes  it 
impossible  to  employ  labor  at  its  maximum  efficiency.  And 
if  it  were  true  that  the  insufficiency  of  live  capital  could  be 
traced  to  the  insufficiency  of  capital  goods  in  existence,  a  mere 
addition  to  the  volume  of  money  could  not  possibly  supply 
more  capital. 

The  idea  of  an  insufficiency  of  capital  goods  is  however 
plainly  at  variance  with  actual  facts.  Why  is  it  that  the  indus- 
trial world  is  so  anxiously  seeking  for  new  markets  for  its 
excess  productions  ?  Why  is  it  that  the  business  world  is  striv- 
ing to  prevent,  through  the  imposition  of  tariffs,  the  impor- 
tation of  that  supply  of  capital  goods  which  would  supple- 
ment their  supposed  insufficiency?  Why  are  we  periodically 
visited  by  conditions  to  which  the  term  "overproduction" 
has  been  applied?  Why  is  it  that  there  is  the  great  trouble 
of  the  unemployed  ?  If  employers  could  readily  obtain  money 
at  an  interest  rate  that  does  not  include  a  monopoly  tribute, 
their  demand  for  capital  goods  with  which  to  increase  labor's* 
efficiency  would  become  effective,  and  it  is  quite  manifest  that 
such  demand  would  be  duly  supplied.  Producers  would  no 
longer  have  any  need  to  hunt  for  distant  markets,  as  the  home 
market  would  readily  absorb  all  their  productions,  and  unin- 
terrupted prosperity  would  follow. 

With  the  increase  of  capital  employed  in  production,  its 
final  efficiency  and,  accordingly,  its  power  of  returning  un- 
earned revenue,  would  diminish,  as  already  stated,  and  with 


428  CONCLUSIONS  [317 

the  consequent  reduction  of  the  incomes  of  the  passive  par- 
ticipants in  production  a  greater  portion  of  the  value  gained 
in  the  process  of  production  must  accrue  to  the  active  partici- 
pants. At  first  the  increase  would  go  to  the  employer  alone, 
but  this  would  induce  a  number  of  workers  to  compete  by 
becoming  employers.  The  demand  for  labor  would  correspond- 
ingly increase,  with  the  result  that  wages  would  rise,  so  that 
in  the  end  all  active  participants  would  obtain  their  shares 
according  to  the  proportionate  value  of  their  respective 
services. 

This  higher  level  of  wages  would  be  brought  about  by 
competition,  the  very  factor  to  which  low  wages  are  erroneously 
ascribed  by  the  socialistic  school  of  economists,  and  would  be 
permanent,  for  with  the  disappearance  of  the  item  7  in  the 
barren  circulation  of  money  (245-249),  the  cause  of  monetan^ 
crises  and  business  depressions  (271-276)  would  be  removed 
once  and  for  all. 

317.  Unfounded  Apprehensions. — A  reform  of  the  cur- 
rency system  in  the  direction  of  greater  freedom  cannot  be 
staved  off  indefinitely,  since  the  fallacy  of  that  theory  of 
economics  on  which  the  prevailing  objection  to  a  natural  expan- 
sion of  the  currency  is  based,  is  gradually  being  recognized  and 
must  ultimately  give  way  to  the  truth.  But  the  inevitable 
outcome  of  such  a  reform,  the  practical  disappearance  of  pure 
interest,  however  salutary  and  beneficial  to  the  community 
at  large,  will  naturally  be  contemplated  with  alarm  by  many 
of  those  for  whom  the  present  system  affords  unearned  gains. 
It  has  often  been  asserted  that  no  one  would  save,  if  savings, 
when  invested,  would  not  return  an  income  (205).  In  their 
effort  to  show  that  pure  interest,  the  unearned  profit  of  capital, 
is  both  just  and  necessary,  leading  economists  have  even  de- 
clared that  in  the  event  of  capital  ceasing  to  obtain  that  profit, 
it  would  not  be  invested,  but  would  be  held  back,  leaving  labor 
unemployed.  They  maintain  that  lack  of  employment  would 
result  from  those  very  conditions  which,  according  to  our  con- 
clusions, would  definitely  put  an  end  to  unemployment.  How- 
ever, it  is  not  difficult  to  show  that  their  assumption  is  totally 
groundless. 


318.  319]     EFFECTS  OF  CURRENCY  REFORM  429 

318.  Natural  Inducements  to  Save. — Is  it  really  true  that 
the  saving  of  wealth  will  cease  when  capital  no  longer  yields 
a  revenue  to  its  o\vner?  This  supposition  is  certainly  not  eon- 
firmed  by  the  conclusions  to  which  our  investigation  points. 
According  to  these  conclusions  an  increasing  amount  of  means 
of  production  will  be  brought  into  use  as  the  rate  of  interest 
on  money  loans  falls  (159).  And  were  the  rate  of  pure  inter- 
est on  money  to  vanish,  the  amount  of  capital  employed  would 
be  increased  to  the  point  where  labor  attains  its  maximum 
efficiency.  The  employer  would  certainly  seek  to  use  that 
method  of  production  which,  under  the  existing  conditions, 
yields  the  greatest  returns  with  the  least  cost  (205),  and  it  is 
only  the  insufficient  supply  of  money  and  consequent  high 
rate  of  interest  that  now  prevents  the  employment  of  that  full 
complement  of  capital  which  enables  labor  to  work  to  the  best 
advantage.  The  desire  to  benefit  from  the  increased  efficiency'' 
of  labor,  the  endeavor  of  the  employer  to  increase  the  recom- 
pense for  his  own  efforts,  is  an  inducement  to  produce  capital 
far  more  potent  than  the  desire  to  get  interest  on  capital ;  and 
since  the  production  of  capital  is  possible  only  by  the  per- 
formance of  work  long  before  the  fruit  of  that  work  becomes 
available  for  consumption,  the  inducement  to  produce  capital 
is  also  an  inducement  to  save. 

But  apart  from  the  advantage  afforded  by  the  use  of  capi- 
tal, there  are  yet  other  inducements  to  the  accumulation  of 
wealth  (196).  Men  of  prudent  disposition  seek  to  provide 
not  only  for  their  declining  years,  but  also  for  unforeseen 
emergencies.  They  make  provision  for  their  families  both  by 
accumulating  savings  and  by  insuring  their  lives.  The  growth 
of  the  system  of  life  insurance  is  a  significant  commentary  on 
the  theory  that  men  prefer  present  to  future  wealth.  Here  we 
actually  see  men  saving  wealth  which  will  never  become 
"present"  wealth  for  themselves,  but  only  for  their  heirs. 

319.  Inducements  to  Invest  Savings. — The  assumption  of 
some  economists  that  if  it  should  come  to  pass  that  capital  no 
longer  commands  pure  interest,  such  savings  as  are  made  will 
not  be  invested  in  production,  is  also  groundless.  It  is  plain 
enough  that  capital  goods  in  productive  use  would  not  be 
withdrawn  therefrom,  if  for  no  other  reason  than  that  such 


430  CONCLUSIONS  [3i9 

withdrawal  would  of  itself  render  them  worthless.  A  selling 
of  the  plant  or  equipment  of  a  business  is,  of  course,  not  a 
withdrawal  of  capital,  but  only  a  change  of  ownership.  A 
withdrawal  would  ensue  only  if  the  owner  of  capital  should 
use  up  in  his  living  and  thus  dissipate  the  income  he  receives 
as  recompense  for  the  depreciation  of  the  capital  goods.  If 
the  income  so  received  is  not  used  up,  but  is  saved  and  stored 
in  the  form  of  money  instead  of  being  applied  to  restore  the 
capital  as  it  wears  out,  this  money,  it  will  be  remembered, 
has  value  only  because  it  constitutes  a  claim  to  actual  wealth 
which  is  in  possession  of  the  issuer  of  the  money  and  which 
is  presumed  to  be  in  use  as  capital.  The  capital  represented 
by  that  money  is  accordingly  invested  capital,  and  the  with- 
holding of  the  money  from  use  does  not  constitute  a  withhold- 
ing of  capital  from  active  employment. 

It  is  true  that  under  present  conditions  the  hoarding  of 
money  has  the  effect  of  restricting  the  activity  of  labor;  not, 
however,  through  a  withdrawal  of  capital,  as  it  is  usually  desig- 
nated, but  by  diminishing  the  medium  of  commerce  which, 
as  it  is,  exists  in  insufficient  quantity.  Hoarding  of  money 
simply  aggravates  the  evil  effects  of  our  faulty  currency  laws. 
Once  the  undue  limitation  on  the  use  of  credit  as  a  medium 
of  exchange  is  removed,  the  hoarding  of  money  would  be  of  no 
consequence  to  the  community  at  large,  as  the  present  hin- 
drance to  the  turning  of  idle  into  active  capital  would  no 
longer  exist. 

The  apprehension  that  unemployment  would  follow  the 
shrinking  of  pure  interest  is  to  be  traced  to  a  prevailing  mis- 
conception as  to  the  causes  of  involuntary  idleness.  We  need 
only  place  before  our  mind  the  process  by  which  invested  capi- 
tal would  lose  its  power  to  command  pure  interest.  The  first 
effect  of  a  thoroughgoing  currency  reform  being  a  reduction 
of  the  interest  commanding  power  of  money,  the  investment 
of  money  in  industrial  undertakings  would  be  stimulated,  as 
already  said  (155-162),  and  this  would  in  turn  result  in  a 
reduction  of  the  interest  commanding  power  of  capital  goods 
used  in  production.  An  increase  of  the  amount  of  capital  in 
productive  use  would  accordingly  precede,  in  fact,  be  the 


819]  EFFECTS  OF  CURRENCY  REFORM  431 

cause  of,  the  decline  of  the  interest  commanding-  power  of 
capital  goods.  This  again  brings  up  the  question  as  to  how- 
low  the  rate  of  capital  interest  is  likely  to  fall  before  it  ceases 
to  be  an  inducement  for  further  investments. 

The  investor  naturally  takes  into  consideration  the  risk 
he  runs  of  losing  a  part  or  all  of  what  he  ventures.  This  risk 
exists  in  endless  forms.  Articles  of  manufacture  may  become 
obsolete.  ]\Iachines  not  only  wear  out,  but  may  be  superseded 
by  new  inventions.  Insurance  in  its  various  phases  does  not 
afford  complete  assurance  against  possible  losses  in  business. 
The  reluctance  to  assume  such  risks  accounts  for  a  limitation 
of  capital  investments  and  prevents  capital  returns  from 
falling  below  the  point  where  these  contingencies  are  fully 
covered. 

"Whether  this  point  will  ever  be  reached  in  practice,  or 
whether  an  increase  of  investments  will  be  halted  before  it  is 
reached,  leaving  the  chances  of  gain  still  to  overbalance  the 
chances  of  loss,  must  be  left  for  the  future  to  determine.  It 
is  not  inconceivable  that  the  impulse  to  the  making  of  further 
investments  would  cease  before  returns  from  invested  capital 
fall  to  the  point  of  its  mere  insurance  and  maintenance,  so  that 
an  item  of  pure  capital  interest  would  still  be  left  as  part  of 
the  average  income  from  invested  capital.  But  so  long  as  there 
remains  an  average  profit,  however  small,  it  is  more  likely 
that  the  investment  of  savings  would  continue  in  preference 
to  keeping  them  idle,  and  that  in  the  end  this  remaining  profit, 
namely,  the  item  of  pure  capital  interest,  would  entirely  disap- 
pear. The  investor's  recompense  would  then  be  the  costless 
conservation  of  his  savings,  coupled  with  the  chance  of  gain 
attended  by  an  equal  chance  of  loss.  The  getting  of  a  regular 
unearned  income  out  of  accumulated  savings  would  thus  natur- 
ally come  to  an  end,  and  the  owner  of  wealth  who  does  not  work 
would  simply  have  to  draw  on  that  wealth  for  his  living. 

These  conclusions  apply  of  course  only  to  purely  passive 
investors.  To  the  investor  who  is  at  the  same  time  actively 
engaged  in  the  work  of  organizing  or  managing  the  enterprise, 
or  who  applies  in  his  investment  more  than  ordinary  judgment 
and  foresight,  there  would  naturally  accrue  a  due  return.    But 


432  CONCLUSIONS  [320 

such  return  would  be  in  the  nature  of  wages  rather  than  of 
capital  interest. 

When  the  normal  return  of  invested  capital  is  reduced  to 
its  mere  maintenance,  and  capital  has  no  longer  the  power  to 
gain  for  its  owner  a  regular  income  not  earned  by  him,  students 
of  economics  will  be  relieved  of  one  of  the  vexing  problems  on 
which  the  authorities  are  at  odds,  namely,  the  proper  definition 
of  "capital"  (129).  There  would  be  no  need  for  considering 
capital  a  distinct  category  of  wealth.  ' '  Capital ' '  and  * '  wealth ' ' 
would  then  be  recognized  as  synonyms,  and  the  use  of  the  word 
in  equivocal  and  misleading  meanings  would  soon  fall  away, 
especially  where  the  term  is  used  virtually  in  the  sense  of 
"medium  of  exchange."  This  is  the  case  when  it  is  said 
that  "capital"  is  needed  for  carrying  out  a  certain  enterprise, 
such  as  the  building  of  a  railroad  or  the  development  of 
natural  resources.  It  is  well  known  that  the  "capital"  re- 
quired in  such  cases  is  money,  and  that  this  money  is  furnished 
almost  entirely  in  the  form  of  bank  credit. 

Suppose  a  community  requires  a  market-house  and  wants 
to  build  it  without  calling  on  capitalists  for  the  means.  If 
the  work  were  undertaken  by  the  community  itself,  the  value 
created  as  the  work  proceeds  could  be  applied  as  basis  for  an 
issue  of  currency,  duly  redeemable,  with  which  to  pay  the 
workers.  The  community  could  thus  effectively  "finance" 
the  enterprise,  while  at  the  same  time  the  members  of  the 
community  would  be  supplied  with  a  medium  of  exchange  that 
goes  into  circulation  without  the  intervention  of  an  agency 
to  which  a  toll  in  the  form  of  pure  interest  must  be  paid,  not 
only  at  the  start,  but  continuously  thereafter.  This  has 
actually  been  done  in  the  well-known  and  often  quoted  case 
of  the  Guernsey  market-house ;  and  why  the  example  there  set 
has  not  been  generally  adopted  is  indeed  difficult  to  understand. 

320.  Opposition  to  Currency  Reform. — There  can  be  no 
question  that  a  currency  reform  admitting  of  such  an  increase 
of  the  currency  issue  as  will  adapt  exchange  facilities  to  the 
effective  demand  would  encounter  opposition  on  the  ground 
that  it  would  work  an  injustice  to  the  investor  of  capital.  But 
such  opposition  can  logically  proceed  only  from  one  or  the 


320]  EFFECTS  OF  CURRENCY  REFORM  433 

other  of  two  standpoints.  The  pure  interest  which  capital 
now  commands  is  either  natural  and  just,  or  it  is  unnatural 
and  unjust. 

Let  us  first  take  the  standpoint  that  pure  capital  interest 
is  something  natural,  on  the  ground  that: 

the  rate  of  interest  is  not  regulated  by  the  abundance  or  scarcity  of 
money,  but  by  tlie  abundance  or  scarcity  of  that  part  of  capital  not 
consisting  of  money;'"" 

or  that  capital  interest  is  the  reward  of  "abstinence"  or  is 
due  to  a  natural  undervaluation  of  future  as  compared  with 
present  goods.  In  either  case  no  change  in  the  currency  system 
could  possibly  affect  the  interest  commanding  power  of  capital, 
and  opposition  to  currency  reform  on  the  ground  that  it  would 
work  injustice  to  capital  would  be  illogical. 

On  the  other  hand,  to  concede  that  through  a  liberal  reform 
of  the  currency  system  capital  would  be  divested  of  its  power 
to  command  pure  interest  would  be  tantamount  to  an  admis- 
sion that  this  power  of  capital  is  unnatural  and  unjust,  and 
opposition  to  such  reform  would  be  worse  than  illogical. 

Opposition  may,  however,  proceed  on  still  other  grounds. 
There  is  a  prevailing  opinion  that  the  only  effect  of  an  increase 
of  currency  would  be  that  of  deranging  prices.  This  question 
has  been  discussed  before  (239a),  but  since  the  succeeding 
developments  of  our  inquiry  have  thrown  further  light  on  the 
subject,  we  may  briefly  resume  its  consideration. 

So  long  as  currency  is  redeemable  in  gold,  the  purchasing 
power  of  money  can  fall  only  by  a  lowering  of  the  value  of  gold 
metal.  The  question  therefore  resolves  itself  into  this :  Would 
the  proposed  money  reform  have  the  effect  of  making  the  metal 
gold  cheaper  in  comparison  with  other  things  generally  ? 

When  banks,  by  furnishing  security  to  the  government, 
can  obtain,  without  charge  or  other  limitation,  money  with 
which  to  replenish  their  necessary  reserves,  and  so  be  inde- 
pendent of  either  the  uncertain  current  of  deposits,  or  the 
alternative  of  getting  gold  for  the  purpose,  it  is  altogether 
reasonable  to  expect  that  quantities  of  that  metal,  now  held 

«*Kicardo,  p.  284. 
28 


434  CONCLUSIONS  [320 

in  banks  and  treasury  vaults,  will  be  put  upon  the  market. 
That  this  increase  of  its  market  supply  would  result  in  a  fall 
of  its  value  is  self-evident  and  is  illustrated  in  diagram  Fig. 
11.  As  the  amount  OV  becomes  less,  the  value  of  gold  will  not 
remain  equal  to  q'a',  but  will  approach  the  rate  qa  (108).  In 
other  words,  prices  will  rise.  This  can,  however,  have  no 
worse  effect  upon  business  than  does  the  rise  of  prices  usually 
observed  when  activity  returns  after  a  spell  of  business  stag- 
nation. Moreover,  as  this  fall  in  the  value  of  gold  would  be 
coincident  with  an  abundant  supply  of  gold  in  the  market, 
an  emergency  requiring  a  delay  of  gold  redemption  under  our 
proposed  currency  reform  would  hardly  ever  arise  (296,  297, 
303a).  It  should  be  borne  in  mind  that  this  fall  in  the  value 
of  gold  would  be  due  to  the  liberation  of  gold  metal  now  stored 
as  reserve  fund,  and  not  to  any  increase  of  the  volume  of  cur- 
rency (239c).  The  value  would  therefore  not  fall  in  the 
same  ratio  in  which  the  currency  is  increased,  as  the  advocates 
of  the  volume  theory  maintain,  but  only  to  about  the  value  that 
gold  would  naturally  have,  were  it  not  used  for  monetary  pur- 
poses.   This  rate  is  shown  by  the  ordinate  qa  of  Fig.  11. 

Those  authorities  who  insist  that  a  material  increase  of 
currency,  regarded  by  them  as  "inflation"  (341),  must  lead 
to  a  proportional  increase  of  prices,  reason  on  the  theory  that 
the  value  of  money  is  governed  by  its  volume,  a  theory  which 
we  have  found  to  be  baseless.  The  followers  of  this  theory, 
propounded  by  classic  authority,  have  endeavored  to  elaborate 
and  fortify  it  without  critically  scrutinizing  the  premises  on 
which  it  is  founded.  Under  the  influence  of  this  school  of 
economists  this  doctrine  has  been  kept  constantly  in  view 
in  the  enactment  of  our  currency  laws.  The  natural  growth 
of  commerce  has  been  hindered  through  allowing  ourselves  to 
be  guided  by  this  misleading  theory,  whereby  it  is  made  to 
appear,  as  John  Stuart  Mill  implies  (2396),  that  an  increase 
of  the  volume  of  currency  would  enrich  the  issuers  of  the  addi- 
tional notes  at  the  expense  of  the  holders  of  the  previous 
issues.  In  reality,  the  prevailing  laws,  instead  of  preventing 
"robbery,"  as  Mill  puts  it,  actually  gives  to  possessors  of 
money  and  other  capital  the  power  to  ' '  levy  a  tax ' '  on  industry 
and  commerce. 


321]  EFFECTS  OF  CURRENCY  REFORM  435 

To  the  end  of  meeting  every  objection  that  may  be  urged 
against  the  introduction  of  the  proposed  currenej^  reform  we 
should  also  carefully  consider  the  question  whether  this  reform 
can  be  introduced  without  harmful  effects  in  one  country, 
while  the  present  system  of  limitation  is  retained  elsewhere. 
The  first  result  would  naturally  be  an  extraordinary  develop- 
ment of  industrial  activity,  shortly  followed  by  a  rise  of  wages 
and  a  fall  in  the  rate  of  capital  returns.  This  reduction  of 
profits  would  furnish  an  impulse  to  the  investment  of  capital 
abroad  where  higher  interest  rates  prevail.  Foreign  exchange 
would  rise  as  a  result  to  a  point  where  the  exportation  of  gold 
would  become  remunerative,  and  this  would  tend  to  deplete 
the  country  of  its  stock  of  gold  (303&).  This  would  seem  to 
endanger  the  stability  of  the  currency  redeemable  in  gold. 
There  need,  however,  be  no  fear  of  such  a  result,  because  the 
low  interest  rate  that  impels  the  exportation  of  gold  would 
at  the  same  time  favor  the  exportation  of  goods  to  such  an 
extent  that  the  payments  for  the  excess  of  exported  goods 
would  soon  reverse  the  flow  of  gold. 

The  financial  history  of  Great  Britain  during  the  nine- 
teenth century  fully  bears  out  this  view.  The  rate  of  interest 
in  that  countrj'-  was  lower  than  in  any  other,  and  its  export 
trade  grew  to  unparalleled  proportions,  so  that  in  consequence 
the  gold  market  of  the  world  became  centred  in  the  British 
metropolis.  A  relatively  low  interest  rate  was  throughout 
that  period  coincident  with  an  influx  of  gold. 

321.  The  Increasing  Cost  of  Living. — For  some  time  past 
the  conviction  has  been  growing  in  the  public  mind  that  many 
of  the  existing  industrial  ills  are  traceable  to  defects  of  our 
monetary  system.  Many  observers  have  become  persuaded  that 
the  fault  lies  mainly  in  the  instability  of  the  value  unit.  The 
universal  rise  of  the  "cost  of  living"  has  of  late  attracted 
much  attention  and  widespread  discussion. 

While  a  number  of  contributory  causes  have  been  at  work 
to  raise  the  cost  of  living,  the  principal  cause  is  no  doubt  to  be 
found  in  the  vast  improvements  made  in  the  metallurgy  of 
gold.  Through  the  introduction  of  the  cyanide  process  gold 
is  now  obtained  with  less  labor  and  cost  than  formerly.  The 
consequent  lowering  of  the  supply  curve  -S'^S'  of  Fig,  H  accounts 


436  CONCLUSIONS  [322 

at  once  for  a  lowering  of  the  value  of  gold.  Where  gold  is  the 
standard  commodity,  a  general  rise  of  prices  is  the  inevitable 
consequence. 

Among  the  various  propositions  directed  toward  estab- 
lishing a  value  unit  that  shall  be  practically  independent  of 
the  value  fluctuation  of  any  single  commodity,  the  one  most 
frequently  considered  is  the  establishment  of  a  composite  unit 
(31).  In  discussing  the  difficulties  of  introducing  such  a  unit 
(111),  we  had  not  yet  reached  a  point  where  we  could  properly 
deal  with  a  project  based  on  the  idea  that  the  value  of  money 
varies  inversely  as  its  volume,  other  things  remaining  equal. 
That  project  has  been  devised  with  the  idea  of  maintaining 
the  market  value  of  the  schedule  of  commodities  composing 
the  standard  at  a  designated  sum,  say,  one  hundred  dollars, 
by  the  following  method.  The  comptroller  of  the  currency, 
or  some  like  authority,  is  to  compute,  from  the  daily  market 
reports,  the  current  price  of  the  schedule  list  of  goods.  When- 
ever this  total  shall  be  found  to  be  greater  or  less  than  the 
prescribed  sum,  he  is  to  withdraw  or  to  emit  currency,  as  the 
case  may  be.  It  is  supposed  that  prices  will  thereupon  obedi- 
ently fall  or  rise,  as  the  volume  of  outstanding  notes  is  reduced 
or  increased,  restoring  the  value  of  the  scheduled  list  of  com- 
modities to  its  prescribed  sum.  But,  as  we  have  learned  (115- 
125),  this  result  would  not  ensue;  hence  the  experiment  would 
necessarily  end  in  failure. 

322.  A  Real  Source  of  Danger. — The  desire  to  establish 
an  invariable  standard  of  value  takes  a  more  dangerous  turn 
in  the  proposal  to  establish  a  value  unit  that  shall  be  inde- 
pendent of  any  commodity'  whatever.  For  some  reason,  the 
belief  that  legal-tender  notes  need  not  be  redeemable  at  all,  but 
that  they  are  invested  with  value  by  the  fiat  of  government,  has 
gained  considerable  acceptance  (97&).  The  advocates  of  this 
notion  propose  to  issue  legal-tender  notes  and  simultaneously 
to  abolish  any  and  every  commodity  standard,  maintaining 
that  in  this  way  an  invariable  value  unit  can  be  established. 
But  as  such  notes  would  not  be  redeemable  in  any  definite 
quantity  of  a  specified  commodity,  they  could  not  be  certifi- 
cates of  a  definite  debt,  and  accordingly  could  not  possess  any 


322]  EFFECTS  OF  CURRENCY  REFORM  437 

definite  value  (97a).  Any  attempt  to  put  this  idea  into 
practice  would  surely  add  another  to  the  many  failures  of 
projects  of  this  kind  recorded  in  history. 

When  men  like  Law  and  Mirabeau  obtained  the  power  to 
carry  out  their  schemes,  they  flooded  their  country  with  fiat 
notes  which  at  first  circulated  on  basis  of  the  popular  belief 
in  their  validity.  But  they  soon  depreciated,  and  finally  their 
worthlessness  became  generally  recognized,  precipitating  the 
country  into  ruin  and  misery.  Instead  of  a  blessing,  these 
issues  became  a  curse. 

These  and  similar  failures  are  frequently  ascribed  to 
"inflation,"  that  is,  to  the  issue  of  more  money  than  was 
needed,  while  in  reality  they  were  due  to  the  fact  that  these 
notes  were  in  no  way  redeemable.  Whenever  currency  notes 
are  put  into  circulation,  the  issuing  power  obtains  things  or 
services  for  mere  pieces  of  paper,  or  at  most  mere  promises 
to  pay.  The  issuing  authority  should  therefore  be  considered 
as  having  obtained  a  loan,  and  unless  it  is  made  responsible 
to  pay  this  debt  in  the  end,  no  one  else  can  be  expected  to  do 
so  in  its  behalf. 

The  "fiat"  notion  of  the  value  of  money  is  a  twin  brother 
of  the  volume  theory.  Both  ideas  are  based  on  the  untenable 
proposition  that  the  value  of  money  is  due  to  the  demand  that 
exists  for  a  medium  of  exchange  (115).  The  disastrous  ex- 
perience of  "wild-cat  banking"  (1036)  is  no  doubt  to  be 
attributed  principally  to  the  prevalent  acceptation  of  the  fiat 
theory.  The  American  bankers  of  the  middle  of  the  nine- 
teenth century  misinterpreted  the  experience  of  the  gold- 
smiths of  past  centuries  (103a).  Imbued  with  the  notion  that 
the  notes  they  were  issuing  possessed  value  because  they  sup- 
plied a  demand,  these  bankers  considered  that  nothing  more 
than  a  small  coin  reserve  was  necessary  to  sustain  their  value. 
Under  this  erroneous  impression  many  banks  dissipated  their 
a.ssets,  and  when  the  time  of  reckoning  came  they  were  unable 
to  meet  their  obligations  and  failed. 

The  advocates  of  both  the  volume  and  the  fiat  theories  often 
point  to  our  past  experience  with  greenbacks  and  the  similar 
experience  of  a  number  of  European  nations  with  depreciated 


438  CONCLUSIONS  ia23 

currency  as  a  proof  that  the  value  of  the  "money  unit"  is 
independent  of  the  value  of  either  gold  or  silver  or  any  other 
commodity  that  may  be  adopted  as  a  standard  of  value  (112), 
taking  as  evidence  the  fact  that  specie  rose  to  a  premium  dur- 
ing the  period  of  the  irredeemable  greenbacks  and  disappeared 
from  circulation.  That  the  phenomenon  can  be  satisfactorily 
explained  without  recourse  to  the  phantastic  notion  that  value 
can  inhere  in  money  consisting  of  nothing  more  than  pieces  of 
paper  legalized  to  serve  as  money  has  been  shown  before  (96). 

323.  The  Land  Question. — In  our  analysis  of  the  factors 
which  come  into  play  in  the  determination  of  land  values  we 
were  unable  to  bring  the  study  to  a  final  conclusion  (185), 
since  at  that  point  the  causes  of  the  interest-returning  power 
of  money  and  capital  had  not  been  traced.  In  the  light  of 
our  subsequent  conclusions  we  may  now  proceed  to  give  the 
land  question  final  consideration. 

Kent,  in  the  economic  sense,  being  the  share  of  the  net 
income  of  productive  groups  which  normally  accrues  for  the 
use  of  the  land,  is  determined,  as  wall  be  remembered,  by 
deducting  from  the  market  value  of  the  produce  of  a  produc- 
tive group  all  costs  of  production  apart  from  any  charge  for 
the  use  of  the  land  (173).  The  process  by  which  rent  is  deter- 
mined was  illustrated  by  the  diagram  Fig.  20,  and  may  be 
briefly  reviewed  as  follows : 

Since  the  different  elements  making  up  the  total  supply  of 
a  given  commodity  are  produced  in  different  localities,  their 
production  and  transportation  to  the  market  require  varying 
expenditure  of  labor  and  capital.  By  arranging  the  different 
elements  of  the  supply  in  a  rising  series  of  cost,  we  obtained 
the  curve  SS'.  The  conditions  of  demand  being  represented  by 
the  curve  DD',  it  was  shown  that  normally  the  quantity  brought 
to  market  equals  Oq,  and  the  value  adapts  itself  to  the 
ordinate  qa.  The  element  q',  for  instance,  is  produced  at  a 
cost  equal  to  q's'  and  has  a  market  price  equal  to  q'r'.  The 
user  of  the  land  from  which  this  element  comes  is  therefore 
able  to  obtain  in  the  market  a  service  equal  to  q'r'  in  exchange 
for  a  service  equal  to  q's',  gaining  a  profit  equal  to  s'r',  which 
is  ''rent." 


324]  EFFECTS  OF  CURRENCY  REFORM  439 

"When  the  diagram  was  applied  to  the  question  of  wages, 
and  the  curve  SS'  represented  the  price  limit  from  the  stand- 
point of  the  workman,  that  is,  his  earning  capacity  in  his  alter- 
native occupation,  that  of  his  second  choice,  the  fact  that  the 
limit  of  any  one  of  the  intra-marginal  producers  was  below 
that  of  the  marginal  one  did  not  and  could  not  imply  that  the 
personal  service  rendered  by  this  intra-marginal  producer  w^as 
less  than  that  rendered  by  the  marginal  one.  It  only  indicated 
that  the  degree  of  his  capacity  in  his  occupation  of  first  choice 
materially  exceeded  his  capacity  in  his  occupation  of  second 
choice.  But  when  the  diagram  is  applied  to  the  question  of 
rent,  the  differences  between  the  various  ordinates  represent 
actual  differences  in  the  measure  of  effort  expended,  or  of  ser- 
vice rendered,  by  the  users  of  the  different  plots  of  land  in  the 
production  of  equal  quantities  of  produce.  Any  user  of  intra- 
marginal  land,  say  of  the  land  which  yields  the  element  located 
at  q',  when  he  sells  his  produce  obtains  in  the  market  the 
greater  service  q'r'  in  exchange  for  something  which  requires 
for  its  production  the  lesser  service  q's',  and  the  excess  s'r' — 
namely,  the  rent — is  furnished  by  those  who,  owing  to  the 
circumstances  of  the  case,  must  produce  and  pay  this  excess 
(180,  329). 

That  the  surplus  s'r'  is  primarily  acquired  by  the  user  of 
the  land,  and,  if  the  user  is  not  also  the  OAvner,  subsequently 
by  the  owner,  has  been  shown  before  (171). 

324.  The  Right  of  Land  Ownership. — The  right  to 
acquire  the  rent  is  universally  conceded  to  the  landowner. 
There  is,  however,  a  duty  imposed  upon  him,  namely  that  of 
paying  the  land  tax,  and,  as  we  have  already  seen  (184), 
through  this  tax  he  is  obliged  to  share  the  rent  with  the 
community  in  a  certain  proportion.  But  he  retains  the  greater 
share  for  himself,  and  our  next  task  is  to  find  the  basis  of  his 
right  to  that  share.  We  know  that  he  is  the  owner  of  the 
land  by  virtue  of  a  communal  conces.sion.  But  what  is  he 
doing  to  earn  the  share  of  the  rent  which  he  retains?  Is  he 
returning  an  equivalent  service?  Has  he  done  aught  that 
justly  entitles  him  to  this  rovonue,  or  is  the  community  making 
him  a  gift  of  it? 

Falling  back  on  fundamental  premises  (21),  we  must  re- 


440  CONCLUSIONS  [32S 

gard  the  right  of  private  ownership  of  land  as  a  right  of 
exclusive  possession  or  control  which  exists  by  virtue  (1) 
of  the  tacit  consent  of  the  community  to  leave  the  owner  in 
possession,  and  (2)  of  the  effective  protection  of  that  posses- 
sion by  the  community.  The  owner  of  land  thereby  acquires 
an  advantage,  in  so  far  as  the  products  of  intra-marginal  land 
have  a  value  that  yields  not  only  a  return  for  the  effort  of 
production,  but  also  a  further  return  in  the  shape  of  rent. 

325.  Land  Lav^^s  Examined. —  Whether  the  right  of  pri- 
vate land  ownership  is  equitable  or  otherwise  may  be  exam- 
ined through  a  comparison  of  the  rights  and  duties  involved 
(20). 

The  benefit  which  the  landowner  derives  from  the  owner- 
ship of  land  is  rent.  This  being  primarily  derived  from  the 
community  at  large,  the  only  return  required  of  the  land- 
owner which  can  be  considered  as  a  duty  is  his  obligation  to 
pay  such  tax  as  the  community  levies  on  the  land.  The  right 
and  duty  can  be  contrasted  as  follows: 

The  right  of  the  landlord  accords  him  the  re7it,  while  his 
duty  is  measured  by  the  land  tax  he  is  obliged  to  pay.  Con- 
versely, the  right  of  the  community  consists  in  realizing  the 
tax,  and  its  duty  consists  in  protecting  the  owner's  exclusive 
right  of  possession  and  use,  which  includes  the  right  to  sell 
the  products  of  the  land  at  their  market  value.  Since  the  value 
of  products  obtained  on  intra-marginal  land  exceeds  the  cost — 
in  other  words,  the  value  of  the  service — of  their  production,  it 
follows  that  the  community,  in  buying  those  products,  gives  a 
greater  service,  represented  by  q'r'  (Fig.  20)  in  exchange 
for  a  lesser  service,  measured  by  q's,  the  excess  sV  being  rent. 

In  our  former  analysis  (184)  we  found  that  the  tax  levied 
on  land  is  but  a  comparatively  small  portion  of  the  rent.  Ac- 
cordingly, the  landlord  obtains  from  the  community  something 
of  which  he  gives  only  a  fractional  part  in  return.  The  com- 
munity gives  something  for  which  it  obtains  less  than  an 
equivalent.  This  is  true  whether  the  rent  is  of  agricultural, 
of  commercial,  or  of  industrial  origin.  The  principle  remains 
the  same.  It  follows  that  the  service  obtained  by  the 
landowner  by  virtue  of  his  right  has  a  value  greater  than  the 


326]  EFFECTS  OF  CURRENCY  REFORM  441 

service  rendered  by  him  as  a  duty.  Conversely,  the  service 
which  the  commimity  renders  to  the  landlord  as  a  duty  has  a 
value  greater  than  the  service  which  it  obtains  as  a  right. 
Right  and  duty,  iu  the  case  of  land  ownership,  are  not  evenly 
balanced.  Hence  the  present  form  of  land  ownership,  in  so 
far  as  it  embraces  the  right  of  the  owner  to  keep  for  his  own 
use  a  portion  of  the  economic  rent,  is  in  principle  clearly 
inequitable. 

This  inequity  becomes  strikingly  apparent  where  the  land 
is  leased  to  a  tenant.  In  that  case  the  landowner  ceases  to  be 
the  user  of  the  land,  but  still  gets  the  surplus  of  the  service 
rendered  by  the  community  over  the  service  rendered  by  the 
tenant.  Although  doing  nothing  more  towards  establishing 
and  maintaining  the  right  exercised  by  the  tenant  than  any 
other  member  of  the  community,  he  yet  continues  to  get  the 
difference  between  the  value  of  the  right — the  rent — and  the 
cost  of  the  duty — the  tax. 

In  studying  the  composition  of  productive  groups  (143) 
we  considered  the  owner  of  the  land  which  was  used  by  such 
group  to  be  one  of  its  members,  perfoi'ming  a  service  for 
which  he  receives  the  rent.  We  now  find  that  this  service  is 
not  really  performed  by  the  landowner,  but  by  the  community 
in  general.  In  an  equitable  state  of  affairs  this  rent  should, 
accordingly,  go  to  the  community  and  not  to  the  landowner 
(368).  There  is  evidently  a  certain  measure  of  inequity 
involved  in  the  present  system  of  land  tenure. 

326.  Land  Ownership  a  Vested  Right. — That  the  system 
of  absolute  land  ownership  is  essentially  inequitable  has  been 
recognized  by  various  thinkers  since  the  time  of  Moses,  whose 
ordinance  of  the  Jubilee  Year  was  calculated  to  remedy  the 
injustice.  Similar  considerations  form  the  basis  of  the  plan 
of  land  tenure  known  as  the  "single  tax"  system.  However, 
this  plan  is  regarded  by  many  as  embracing  an  element  of 
injustice  similar  to  that  which  it  is  intended  to  correct.  The 
imposition  of  a  tax  on  land  e<iual  to  the  economic  rent  would, 
according  to  Henry  George,  have  the  effect  of  reducing  land 
values  to  nil,  or,  as  he  puts  it,  confiscating  land  values  (359- 
360).     A  reform  entailing  such  loss  on  landowners  would 


442  CONCLUSIONS  [326 

naturally  be  resisted  by  them.  Land  ownership  is  a  vested 
right  acquired  by  owners  from  the  community  and  assured  to 
them  by  law.  When  land  first  became  private  property,  it 
was  in  most  cases  no-rent  land,  and  as  such  had  practically  no 
value.  The  value  which  land  now  possesses,  apart  from  the 
value  of  the  improvements  produced  by  labor,  has  been 
acquired  by  land  in  the  course  of  time.  Why,  it  may  be  asked, 
should  the  present  owner  be  deprived  of  the  value  which  the 
land  has  acquired  through  centuries,  when  this  value  has  arisen 
without  cost  to  anybody? 

It  is  this  last  supposition  which  is  open  to  question.  While 
it  is  indeed  true  that  land  value  has  arisen  without  a  direct 
cost  to  anybody,  this  increase  of  value  has  been  coincident 
with  and  due  to  a  burden  which  the  community  has  taken  upon 
itself.  Land  has  acquired  its  value  only  as  it  has  acquired  the 
capability  of  yielding  rent,  and,  as  we  have  seen,  rent  is  what 
is  left  of  the  value  obtainable  from  the  land  after  all  costs  of 
producing  this  value  has  been  covered.  This  rent  is  paid  by 
the  community,  whether  through  payment  for  cabbages  pro- 
duced on  the  land,  or  for  convenience  of  shopping  in  the  centre 
of  a  business  district,  or  for  the  luxury  of  a  seat  in  a  theatre. 
Through  the  purchase  of  the  products  of  intra^marginal  land 
the  community  contributes  to  the  owTier  of  the  land  a  revenue 
which  he  gets  without  returning  to  the  community  more  than 
a  portion  in  the  form  of  land  tax.  That  which  remains  to  him, 
when  capitalized  at  the  prevailing  interest  rate,  stands  as  the 
value  of  land.  The  community  is  in  fact  paying  what  is 
analogous  to  interest  on  a  debt  equal  to  the  value  of  the  land 
( 329 ) .  The  right  of  land  ownership,  as  it  stands  now,  is  clearly 
a  remnant  of  the  feudal  ages  which  enables  the  landowner  to 
obtain  from  the  community  an  income  which  he  does  not  earn. 

It  is,  however,  easier  to  point  out  the  inequity  of  the  exist- 
ing system  of  land  tenure  than  it  is  to  formulate  a  practicable 
plan  for  correcting  the  injustice.  The  right  to  the  exclusive 
possession  of  land  is  necessary  to  induce  men  to  cultivate  it, 
to  improve  it,  to  place  buildings  on  it.  It  often  takes  years 
before  the  full  benefit  of  labor  bestowed  on  land  can  be  realized. 
Justice  demands  that  this  benefit  be  assured  to  those  who  make 


327.  328]     EFFECTS  OF  CURRENCY  REFORM  443 

the  improvements.  Unless  he  who  cultivates  or  otherwise 
improves  the  land  is  protected  in  the  ownership  of  the  fruit 
of  his  labor,  our  civilization  must  fail.  Unless  a  reasonable 
remedy  is  instituted,  the  cure  may  he  worse  than  the  evil. 
Such  remedy  must  have  the  effect  of  depriving  the  landowner 
of  the  right  to  get  something  for  nothing,  but  must  leave  to 
him  the  full  benefit  of  his  owtl  effort  in  utilizing  the  land. 

327.  Bearing  of  Currency  Reform  on  the  Land  Question. 
— However  involved  the  problem  may  appear  at  first  glance, 
it  will  be  found,  upon  closer  examination,  that  with  the  money 
monopoly  abolished,  no  radical  change  in  the  system  of  land 
tenure  would  be  necessary  to  work  it  out. 

Our  analysis  of  the  causes  that  determine  the  value  of  land 
shows  that  the  yearly  gain  yielded  by  land,  consisting  of  rent 
plus  increment,  B  -{-  U,  is  divided  into  two  parts,  T  and  /, 
of  which  T  goes  to  the  community  in  the  form  of  land  tax, 
while  the  remainder  I  is  retained  by  the  landowner.  We  also 
found  that  these  two  parts  are  related  to  each  other  in  the 
proportion  which  the  actual  rate  of  taxation  t  (182)  bears  to 
the  current  rate  of  interest  i  (184). 

It  has  been  shown  (315)  that  with  the  removal  of  existing 
monetary  restrictions  the  current  rate  of  pure  interest  would 
fall  to  nil,  and,  according  to  the  rule  by  which  the  division  of 
the  gain  derived  from  the  ownership  of  land  is  determined, 
as  stated  above,  the  land  tax  T  paid  to  the  community  would 
increase  until  it  equals  the  entire  gain  R  -{-  U  yielded  by  the 
land.  The  portion  /  left  to  the  landowner  would  accordingly 
diminish  to  the  vanishing  point.  Thus,  with  the  abolition  of 
the  money  monopoly  the  inequitable  feature  of  the  present 
sy.stem  of  land  tenure  would  automatically  fall  away,  inasmuch 
as  that  which  would  be  returned  to  the  community  in  the  shape 
of  tax  would  fully  balance  that  which  the  landowner  gets 
without  earning  it  (371), 

328.  A  Concrete  Illustration. — The  process  by  which  these 
results  would  come  to  pa.ss  may  be  readily  understood  if  pre- 
sented in  the  form  of  a  concrete  illustration. 

Let  us  first  take  the  case  of  a  piece  of  land  which  has  been 
returning  an  annual  rent  of  $900,  and  the  value  of  wliich  has 


444  CONCLUSIONS  [S28 

remained  unchanged  during  a  number  of  years.  Let  us  also 
assume  that  the  actual  tax  rate  (182a)  is  2  per  cent. 

Supposing  that  the  current  rate  of  interest  on  fully  secured 
loans  had  been  4  per  cent.,  the  value  of  this  piece  of  land  would 
have  been  $900  capitalized  at  4  +  2,  that  is,  6  per  cent.,  which 
would  come  to  $15,000  (183).  The  tax  was  accordingly  $300 
and  the  landowner's  share  $600.  This  land  therefore  repre- 
sented an  investment  returning  a  net  income  of  4  per  cent. 

This  would  not  continue  under  the  operation  of  a  currency 
system  by  which  money  and  capital  goods  would  lose  their 
power  to  command  pure  interest.  It  is  clear  that  the  demand 
for  land  as  an  investment  would  then  be  greater  than  the 
supply,  for  land  would  be  in  demand  as  the  only  form  of 
capital  bringing  a  net  return,  while  the  supply  would  cease, 
since  the  landowners  would  not  exchange  their  paying  invest- 
ment in  land  for  money  or  capital  goods  that  do  not  bring  a  net 
return.  This  excess  of  demand  would  naturally  cause  land 
values  to  rise  (360).    But  how  far  would  they  rise? 

Let  us  assume  that  as  much  as  $30,000  was  bid  for  the 
piece  of  land  in  question.  In  the  case  of  a  sale  at  that  price 
this  would  be  followed  by  a  corresponding  increase  of  its  assess- 
ment. The  annual  tax  would  then  amount  to  $600,  leaving 
for  the  owner  of  the  land  a  clear  profit  of  $300.  This  land 
would  then  still  be  a  profitable  investment,  while  money  and 
capital  goods  would  not  command  pure  interest,  and  conse- 
quently no  unearned  profit.  Competition  for  the  possession 
of  this  land  would  then  tend  to  raise  the  value  still  higher. 
Since  competition  for  the  possession  of  land  would  continue 
as  long  as  it  affords  a  revenue  not  afforded  by  money  or  by 
capital  goods,  the  bidding  would  go  up  as  high  as  $45,000, 
w^hen  the  2  per  cent,  tax  would  absorb  the  entire  economic 
rent  of  $900,  bringing  the  income  from  investments  in  land 
to  a  par  with  that  from  other  capital  investments. 

Now  let  us  suppose  furthermore  that  the  piece  of  land  in 
question  not  only  returns  an  economic  rent  of  $900,  but  has,  for 
some  years  past,  shown  a  yearly  increment  in  value  of  $300. 
This  will  make  the  expected  gross  gain  $1200,  and  the  value 
of  the  land  would  naturally  be  greater  than  in  the  preceding 


328]  EFFECTS  OF  CURRENCY  REFORM  445 

case.  Beginning  again  with  an  initial  condition  of  current 
interest  at  4  per  cent.,  a  tax  rate  of  2  per  cent,  and  the  value 
of  the  land  at  $20,000  (1826),  the  tax  T  would  he  $400  and 
the  net  income  I  of  the  landowner  $800,  or  4  per  cent,  of  the 
investment.  With  the  elimination  of  pure  interest  from  the 
returns  of  other  forms  of  capital,  competition  for  the  land  in 
question  would  raise  its  value,  and  thereupon  the  tax  on  it, 
until  the  value  reaches  $60,000,  making  the  tax  $1200  and 
leaving  no  net  gain  to  the  landowner. 

"We  have  here  been  basing  our  deductions  on  the  assump- 
tion that  the  increment  as  well  as  the  rent  is  a  given  quantity. 
But  our  figuring  shows  that  under  the  assumed  circumstances 
the  increase  of  land  value  would  go  on  very  much  faster  than 
the  rate  assumed.  We  had  assumed  $300  to  be  the  normal 
yearly  increment  of  the  value  of  the  land  in  question,  assumed 
to  be  due  to  an  increase  of  rent,  and  our  illustration  shows 
that  within  a  comparatively  brief  period  the  value  of  this 
land  would  rise  from  $20,000  to  $60,000,  and  this  even  inde- 
pendent of  that  increase  of  rent  which  is  ordinarily  the  cause 
of  the  unearned  increment.  But  this  phenomenal  advance  in 
the  value  of  land  would  be  the  outcome  of  extraordinary  eco- 
nomic changes,  characterized  by  the  gradual  disappearance  of 
pure  interest.  This  rise  of  value  would  come  to  a  halt  when, 
the  period  of  transition  is  past,  and  a  further  increase  would 
thereafter  take  place  only  if  the  rent  or  the  normal  increment 
were  greater  than  above  assumed,  or  the  rate  of  taxation  were 
to  be  reduced. 

The  results  shown  in  the  above  illustrations  do  not  conflict 
with  the  law  of  land  value  heretofore  stated,  our  deduction  of 
that  law  having  necessarily  proceeded  without  taking  into 
consideration  possible  extraneous  influences,  such  as  a  fall  in 
the  rate  of  interest  to  the  point  of  disappearance  of  the  pure 
interest  item. 

It  is  of  course  altogether  probable  that  an  extraordinary 
increase  of  land  values  would  be  attended  by  great  speculative 
activity  which  might  even  enhance  them  beyond  the  level  of 
the  final  adjustment.  In  that  event  a  reaction  would  set  in 
after  tlie  current  rate  of  interest  has  found  its  lowest  level.    It 


446  CONCLUSIONS 

can  safely  be  predicted  that  when  land  values  have  become 
finally  adjusted,  the  tax  on  land  would  have  risen  to  a  point 
where  rent  plus  increment,  R  -^  U,  goes  to  the  community, 
supposing,  of  course,  the  assessment  of  land  values  being 
properly  made.  Such  return  of  rent  is  the  principal  aim  of 
the  single-tax  propaganda,  but  would  be  brought  about  auto- 
matically by  the  far  more  comprehensive  reform  of  removing 
the  existing  arbitrary  impediment  to  the  freedom  of  production 
and  exchange  (364). 

329.  Land  Values  Tantamount  to  a  Public  Debt. — From 
the  above  it  is  plain  that  a  reform  of  the  currency  in  the 
direction  here  proposed  would  have  a  controlling  influence  on 
the  conditions  of  land  tenure,  inasmuch  as  it  would  have 
the  effect  of  equalizing  the  duty  of  the  landowner  with  the 
right  enjoyed  by  him.  Such  land  as  has  a  comparatively  stable 
value  and  which  promises  no  unearned  increment  would  nor- 
mally have  a  value  on  which  the  land  tax  equals  the  economic 
rent ;  and  where  there  is  reason  to  expect  the  value  to  rise  or  to 
fall,  this  expectation  would  be  reflected  in  the  value  of  the 
land  being  greater  or  less  than  the  rent  capitalized  at  the  rate 
of  taxation,  so  that  the  amount  of  the  annual  tax  would  be 
above  or  below  that  of  the  economic  rent  to  the  extent  of  the 
expected  annual  increase  or  decrease  of  the  value  of  the  land. 

We  may  again  reiterate  that  where  actual  facts  are  at  vari- 
ance with  the  theoretical  conclusions  derived  from  economic 
laws,  these  variations  are  to  be  attributed  to  chance  factors, 
just  as  the  scattering  of  the  shots  of  our  illustration  (1)  is  due 
to  the  unsteadiness  of  the  marksman's  aim.  We  have  found 
that  land  values  exceed  the  capitalized  rent  only  if  a  rise 
in  the  value  of  the  land  is  anticipated  by  the  competitors  for 
the  purchase  of  the  land,  hence  the  tax  would  in  general  differ 
from  the  rent  by  the  anticipated  advance  or  decline  of  land 
value.  If  through  some  unlooked-for  occurrence  the  actual 
increase  or  decline  in  value  is  greater  or  less  than  expected, 
our  conclusion  that  the  difference  between  tax  and  rent  equals 
the  increment  or  decrement,  as  the  case  may  be,  would  to  that 
extent  be  at  variance  with  facts.  Where  there  is  a  uniform 
change  of  conditions,  such  as  a  gradual  rise  of  the  rent  due 


329]  EFFECTS  OF  CURRENCY  REFORM  447 

to  a  steady  increase  of  population,  or  to  a  gradual  diminution 
of  the  current  interest  rate,  the  increase  of  land  values  from 
year  to  year  is  correspondingly  uniform,  and  the  expectation 
of  that  increase,  based  on  past  experience,  is  usually  realized. 
But  if  changes  out  of  the  ordinary  take  place,  the  actual 
advance  or  decline  of  land  values  will  not  agree  with  the  antici- 
pation. It  is  reasonable  to  assume  that  ordinarily  such  adven- 
titious influences  are  as  likely  to  affect  land  values  one  way  as 
another  and  that,  wdtli  rare  exceptions,  their  effect  in  the  long 
run  tends  to  balance. 

Supposing  that  there  had  never  been  an  actual  scarcity 
of  money,  and  that  money  would  therefore  never  have  had  the 
power  to  command  interest ;  supposing  also  that  land  owner- 
ship had  always  been  conditional  on  the  payment  of  a  tax,  at 
a  fixed  rate  (332a),  on  the  value  of  the  land:  it  would  follow 
from  what  we  have  learned  above  that  the  taxes  paid  on  land 
would  always  have  been  about  as  much  as  the  rent  derived 
from  the  land  plus  the  increment  of  its  value.  The  eommunit}^ 
would  then  not  only  have  been  paid  for  what  it  furnished  in 
the  form  of  rent  (323),  but  would  also  have  gotten  the  value 
of  the  attendant  increments.  The  owners  of  the  land  would 
therefore  be  justly  entitled  to  all  the  increments  which  make 
up  its  full  value,  having  paid  that  much  to  the  community 
for  the  right  of  owning  the  land  (288).  This  value  would 
virtually  represent  a  debt  due  to  the  landowners  by  the  com- 
munity, payable  whenever  the  community  requires  to  get 
possession  of  the  land  (326,  334). 

But  the  actual  economic  conditions  differ  from  those  of  this 
hypothetical  case.  Monetary  systems  everywhere  are  defective 
and  have  always  been  so  (261),  and  the  item  of  pure  interest 
has  therefore  always  been  a  potent  factor  in  determining  the 
apportionment  of  incomes.  With  competition  hampered 
through  restriction  of  the  freedom  of  exchange,  land  owner- 
ship has  not  been  conditional  on  the  payment  by  the  land- 
owner to  the  community  of  a  tax  equal  to  the  economic  rent 
plus  the  increment  of  land  value.  As  the  case  stands,  the  com- 
munity has  all  along  not  only,  as  it  were,  released  the  land- 
owner from  the  payment  of  a  full  equivalent  for  the  protection 


448  CONCLUSIONS  [329 

and  benefit  rendered  him  by  the  community,  but  also  left  to 
him  the  greater  part  of  the  increment  of  the  land  value,  thus 
incidentally  saddling  itself  with  what  is  tantamount  to  an  obli- 
gation to  the  landowner,  to  the  extent  of  the  value  of  the  land. 
Hence  it  will  be  readily  understood  that  any  increase  of  the 
value  of  land,  in  excess  of  the  tax  paid  on  account  of  that 
increase,  is  a  direct  and  unearned  gain  to  the  landowner  which 
virtually  takes  the  form  of  a  debt  owing  to  him  by  the  com- 
munity, and  which  is  thus  correspondingly  a  loss  to  the  com- 
munity (216). 

That  the  value  of  land  is  in  the  nature  of  a  debt  owed  by 
the  community  to  the  landowner  is  plain  enough  from  the  fact 
that  the  public  is  now  constantly  providing  what  amounts  to 
an  interest  charge,  accruing  to  the  landowner  as  * '  rent. ' ' 

The  adoption  of  a  measure  of  currency  reform  that  would 
remove  the  restrictions  on  the  freedom  of  exchange  would  not 
be  followed  by  an  increase  in  the  market  value  of  land,  if  coin- 
cidently  with  that  reform  the  tax  rate  on  land  would  be  in- 
creased in  the  same  measure  as  the  current  rate  of  pure 
interest  falls,  thus  leaving  the  sum  t  -^i  unchanged.  But 
such  a  constant  adaptation  of  the  tax  rate  to  the  falling  interest 
rate  being  obviously  impracticable,  a  rise  of  land  values  result- 
ing from  the  fall  of  the  interest  rate  is  inevitable.  Such  an 
increase  would  of  course  be  an  unearned  gain  to  the  landowner 
at  the  expense  of  the  community  (3326).  But  whatever  loss 
this  might  entail  on  the  community,  it  would  be  of  trifling 
moment  as  compared  with  the  cost  of  trying  to  attain  social 
justice  on  the  plan  of  either  socialism  or  the  single-tax,  only  to 
find  that  the  one  is  impracticable  (365-367)  and  the  other 
inadequate  to  effect  a  just  distribution  of  wealth  (364). 

Our  successive  deductions  have  enforced  the  conclusion 
that  a  removal  of  the  existing  restrictions  on  the  medium  of 
exchange  would  bring  the  market  value  of  land  to  a  higher 
figure  than  at  present,  notwithstanding  that  the  owner  of  land 
could  no  longer  derive  from  its  ownership  anything  more  than 
what  would  be  the  wages  of  his  own  labor  applied  to  it,  since 
he  would  be  paying  a  tax  amounting  to  the  sum  of  rent  and 
increment,  R  -^  TJ,  which  the  land  affords. 


330]  EFFECTS  OF  CURRENCY  REFORM  449 

This  is  directly  opposed  to  the  conchision  reached  by  Henry 
George  and  accepted  by  his  followers,  that  land  would  no 
longer  have  any  market  value  if  the  tax  were  sufficiently  high 
to  absorb  the  entire  economic  rent.  In  the  absence  of  land 
value,  an  increment  of  such  value  would,  of  course,  be 
precluded. 

Land  values  would  certainly  vanish  if  no  net  return  could 
be  gotten  from  land,  while  capital  goods  and  money  continued 
to  afford  such  revenue.  If,  however,  pure  interest  could  no 
longer  be  obtained  from  money  or  capital  goods,  the  conclusion 
that  land  values  will  disappear  does  not  necessarily  follow. 
"Were  the  community  to  continue  to  impose  a  tax  on  land  at  a 
given  percentage  of  its  value,  such  value  would  necessarily 
continue,  and  its  amount  would  be  determined  by  competition 
for  the  possession  of  the  land  as  outlined  above  (327-328). 
The  value  would  go  up  to  the  point  where  the  land  would  cease 
to  bring  to  its  owner  a  net  return,  for  so  long  as  it  yields  such 
return,  while  other  forms  of  capital  do  not,  competition  for  its 
possession  would  drive  up  its  value  until  the  value  reaches  that 
point. 

The  value  of  land  which  afforded  no  unearned  gain  to  the 
owner  would  be  quite  analogous  to  the  value  of  treasury  notes 
which  afford  no  interest  to  their  holder,  both  alike  representing 
a  debt  owing  by  the  community. 

330.  Assessment  of  Land  Values. — If  a  tax  is  to  be  im- 
posed on  the  value  of  land,  that  value  would  have  to  be  deter- 
mined for  purposes  of  taxation  in  some  manner  prescribed  by 
law.  The  rise  of  land  values  which,  as  we  have  seen,  would 
follow  the  institution  of  a  proper  currency  reform,  would 
require  a  re-assessment,  from  time  to  time,  and  with  any  delay 
of  this  re-assessment  the  amount  of  the  tax  would  remain  below 
the  amount  of  the  economic  rent  and  increment,  leaving  an 
unearned  income  to  the  owner  of  the  land. 

So  long  as  this  appraisement  of  land  is  delegated  to  men 

elected  or  appointed  to  office,  their  determination  is  likely  in 

numerous  instances  to  be  more  or  less  inaccurate.    There  are, 

however,  ways  in  which  it  may  be  possible  to  ascertain  the 

29 


450  CONCLUSIONS  [ssi 

market  value  of  land  with,  reasonable  accuracy,  and  this  with 
less  expense  than  by  official  appraisement. 

Suppose  provision  were  made  to  let  every  owner  of  real 
estate  be  his  own  assessor  and  to  levy  the  tax  on  his  appraise- 
ment. Undervaluation  could  be  guarded  against  by  providing 
that  if  either  the  government  or  any  individual  should  offer  to 
purchase  the  property  at  a  price  exceeding  this  assessment  by 
more  than,  say,  ten  per  cent.,  the  owner  must  either  raise  his 
assessment  to  within  the  ten  per  cent,  of  the  offered  price,  or 
sell  at  that  price.  Under  such  rule  each  property  owner  would 
find  it  to  his  interest  to  record  a  fair  value,  for  if  he  were 
to  assess  the  property  at  too  low  a  figure,  some  one  would 
sooner  or  later  bid  high  enough  to  compel  increase  of  assess- 
ment or  sale.  To  meet  cases  where  sentimental  or  other  psycho- 
logical considerations  come  into  play,  as  in  the  case  of  home- 
stead holdings,  or  in  the  case  of  a  business  having  a  "good- 
will" value,  or  to  guard  against  spite  work,  adequate  regu- 
lations would  of  course  have  to  be  provided. 

331.  Exemption  of  Fixed  Improvements  from  Taxation. 
— Under  such  a  method  of  assessment  as  above  outlined,  the 
tax  would  evidently  be  levied  not  merely  on  the  value  of  the 
land,  but  on  that  of  all  fixed  improvements  as  well,  for  a  sale 
would  inevitably  include  these  improvements.  Any  plan  of 
taxing  land  by  which  not  more  than  its  economic  rent  and  its 
normal  increment  of  value  is  to  go  to  the  community  must  logi- 
cally exclude  improvements  from  taxation.  This  is  quite  in 
conformity  with  the  single-tax  idea  generally.  It  would  accord- 
ingly be  necessary  to  deduct  the  estimated  value  of  the  im- 
provements from  the  total,  in  order  to  exempt  from  taxation 
those  improvements,  whether  they  be  in  the  form  of  buildings 
erected  on  the  land,  or  of  woodland  or  fruit  trees  planted  upon 
it,  or  of  clearing,  of  draining,  of  irrigation.  Where  the 
improvements  are  naturally  subject  to  deterioration,  the  value 
of  the  estate  and  that  of  the  improvements  shrink  together, 
leaving  the  value  of  the  land  unaffected,  unless  the  factors 
which  determine  land  values  have  changed  at  the  same  time. 
In  the  case  of  such  improvements  as  become  incorporated  in  the 
land  (171),  as  in  levelling  it  for  cultivation  and  clearing  it  of 


332]  EFFECTS  OF  CURRENCY  REFORM  451 

rocks,  the  improvement  should  be  given  consideration  in  the 
assessment,  at  least  for  a  number  of  years,  on  the  same  prin- 
ciple as  that  on  which  invention  is  protected  by  letters  patent. 

The  importance  of  exempting  fixed  improvements  on  land 
from  taxation  is  generally  overestimated.  It  is  often  said  that 
a  tax  on  that  part  of  real  estate  which  is  produced  by  labor  is  a 
tax  on  industry;  but  this  view  can  hardly  be  sustained.  Only 
where  the  improvements  consist  of  dwellings,  gardens,  private 
parks,  etc.,  and  are  used  and  occupied  by  the  owner,  will  the 
tax  have  to  be  borne  by  the  owner ;  and  apportionment  of  the 
cost  of  public  protection  in  proportion  to  the  requirement  for 
that  protection  is  not  inconsistent  with  fair  play.  Where,  on 
the  other  hand,  land  is  used  for  industrial  or  commercial 
purposes,  a  tax  assessed  on  the  value  of  buildings  and  other 
appurtenances  of  the  business,  unlike  that  assessed  on  the 
value  of  land,  bears  on  marginal  producers  as  well  as  on  all 
others,  and  for  this  reason  must  be  borne  in  the  end  by  the 
consumei*s  of  the  products  of  the  industry.  It  is  therefore  by 
no  means  a  tax  on  industry,  but  rather  a  tax  on  the  com- 
munity, inasmuch  as  the  consumers  of  the  products  of  industry 
are  distributed  throughout  the  community. 

However,  since  the  tax  on  land  values  alone  would  prob- 
ably yield  a  public  income  fully  adequate  to  meet  all  legitimate 
requirements  of  government,  it  may  be  found  expedient  to  take 
the  measures  above  suggested  for  reducing  the  tax  on  real 
estate  to  one  on  land  values  alone. 

332.  The  Tax  Rate. — In  reaching  the  conclusion  that  the 
tax  on  land  values  would  absorb  economic  rent  and  normal 
increment  if  the  current  rate  of  pure  interest  falls  to  nil,  no 
specific  rate  of  taxation  was  required  to  be  assumed.  No 
matter  what  the  rate  of  taxation  might  be,  rent  plus  increment 
would  go  to  the  community.  If  the  tax  rate  were  low,  land 
values  would  rule  at  a  higher  figure;  with  a  higher  tax  rate 
they  would  be  correspondingly  lower.  In  short,  the  value  of 
land  independent  of  improvements  would  tend  to  become  equal 
to  rent,  plus  increment  capitalized  at  the  rate  of  taxation,  and 
assuming  that  value  to  be  correctly  appraised,  the  total  land 


452  CONCLUSIONS  [332 

tax  would  ultimately  equal  the  economic  rent  plus  the  expected 
increment. 

This  line  of  reasoning  does  not  apply  to  a  tax  on  improve- 
ments, since  their  value  is  determined  by  the  marginal  cost  of 
their  production  (153),  which,  apart  from  incidents  of  chance, 
is  not  affected  by  the  rate  of  land  taxation.  Moreover,  the 
proposition  that  land  values  would  equal  the  sum  of  the  excess 
of  taxes  paid  on  land  over  rent,  if  pure  interest  had  never  come 
into  play,  is  true  only  on  the  supposition  that  the  tax  rate  had 
never  been  changed  (329a),  for  otherwise  the  value  of  land 
would  not  agree  with  the  excess  of  taxes  paid. 

If  the  tax  rate  were  changed  any  time,  injustice  would  be 
done  either  to  the  landowners  or  to  the  community.  Suppose 
that  from  the  first  institution  of  private  land  ownership  the 
rate  of  taxation  had  been  fixed  and  that  the  currency  system 
had  always  afforded  full  freedom  of  exchange,  so  that  now 
land  values,  generally  speaking,  really  equalled  the  excess  of 
taxes  over  the  rent  derived  from  the  land,  then  a  raising  of  the 
tax  rate,  in  depressing  land  values,  would  be  an  injustice  to 
landow^ners  equivalent  to  a  partial  repudiation  of  a  public 
debt  due  to  them;  and,  vice  versa,  a  lowering  of  the  tax  rate 
would  increase  land  values  and  would  thus  without  cause  in- 
crease the  quasi  public  debt  due  to  lando\\Tiers,  and  this  would 
be  unjust  to  the  community.  An  invariable  and  permanently 
fixed  tax  rate  on  land  would  therefore  be  one  of  the  essential 
conditions  of  just  land  laws,  and  such  rate  should  ultimately 
be  established  once  for  all. 

In  the  adoption  of  this  tax  rate  the  interests  of  both  land- 
owner and  community  would  have  to  be  duly  considered.  As 
it  is  impossible,  by  any  plan  whatever,  sharply  to  separate  the 
value  of  land  from  that  of  its  improvements,  it  may  often  hap 
pen  that  the  value  subjected  to  taxation  actually  includes  part 
of  the  improvements,  and  in  order  to  minimize  such  injustice 
as  might  thus  arise,  the  tax  rate  should  be  low.  But,  on  the 
other  hand,  a  low  tax  rate,  entailing  a  corresponding  rise  in 
land  values,  would  materially  increase  the  unearned  advan- 
tages which,  through  a  falling  interest  rate,  landowners  would 
obtain  at  the  expense  of  the  community  (329&). 


sss]  EFFECTS  OF  CURRENCY  REFORM  453 

Suppose  a  rate  of  2  per  cent,  to  be  adopted,  land  values 
would  rise  to  fifty  times  the  annual  rent  plus  increment.  But 
as  this  quasi  debt  of  the  community  to  the  landowners  would 
be  free  of  interest  charge,  it  would  not  be  felt  by  the  com- 
munity, but  would  have  to  be  met  by  future  purchasers  of  land. 

333.  Land  Tax  Ample  for  Public  Needs. — When  the 
public  revenue  from  land  taxation  takes  in  the  sum-total  of 
all  rent  plus  increment,  as  it  would  through  an  effective  cur- 
rency reform — and  no  change  in  the  tax  rate  could  more  than 
temporarily  affect  this  revenue — the  public  receipts  from  this 
source  would  greatly  exceed  the  sum  of  all  taxes  now  collected 
by  towns,  counties,  states  and  nation.  All  other  taxes  could 
therefore  be  dispensed  with  and  the  entire  system  of  taxation 
simplified.  The  towns  or  counties  might  collect  the  land  tax 
and  transfer  a  certain  portion  to  the  states,  and  these,  in  turn, 
a  due  proportion  to  the  national  treasury.  The  total  income 
may  reasonably  be  expected  to  be  so  great  as  to  make  bonded 
public  debts  wholly  unnecessary,  and  those  existing  could  be 
paid  off  as  rapidly  as  they  mature  (288,  341). 

It  would  probably  come  to  pass  under  such  a  system  of 
taxation  that  the  revenue  would  exceed  the  necessary  expenses 
of  government,  and  the  question  of  how  equitably  to  dispose  of 
the  balance  would  thus  arise.  A  similar  problem  has  been  met 
in  some  German  towns  which  own  land,  the  income  of  which 
exceeds  municipal  requirements,  by  returning  the  excess  to 
the  citizens  in  the  form  of  dividends.  Whether  such  a  system 
would  be  practicable  generally  can  only  be  determined  by 
experience.  It  would  certainly  have  a  salutary  effect  on 
voters,  every  one  of  whom  would  have  a  tangible  interest  in  the 
honest  and  economic  application  of  the  public  funds.  But  be 
this  as  it  may,  there  are  many  other  ways  in  which  any  excess 
of  public  revenue  over  the  immediate  costs  of  administration 
might  properly  be  expended.  Schools,  hospitals,  libraries  and 
other  similar  institutions  which  now  depend  on  endowment 
incomes  that  would  practically  cease  with  the  elimination  of 
pure  interest,  could  easily  be  supported  from  this  tax,  and  a 
system  of  pensions  for  old  age  and  other  disability  could  be 


454  CONCLUSIONS  [334 

instituted.    In  short,  numerous  social  problems  could  be  ration- 
ally and  effectively  solved. 

334.  Exclusive  Rights  or  Franchises. — The  greater  num- 
ber, if  not  all,  of  the  public  service  franchises  granted  by 
municipal,  county  and  state  governments,  involving  exclusive 
rights  to  construct  and  operate  railways,  to  lay  gas,  water  or 
electric  conduits,  to  run  overhead  wires,  and  so  forth,  assume 
more  or  less  the  character  of  exclusive  rights  to  the  use  of 
land  and  may  therefore  properly  be  treated  as  a  modified  form 
of  land  ownership  (231).  All  that  has  been  said  regarding 
land  values  fully  applies  to  the  value  of  such  franchises.  As 
in  the  case  of  land,  distinction  is  to  be  made  between  the  value 
of  the  mere  franchise  and  the  value  of  the  improvements 
which  are  essential  to  its  utilization.  The  former  may  be 
traced  to  a  "rent,"  namely,  to  net  profits  derived  from  the 
utilization  of  the  franchise;  and  in  addition  to  this  there  is 
also  generally  an  "unearned  increment." 

Whenever  the  value  of  a  franchise  exceeds  the  value  of  the 
capital  invested  in  its  utilization,  in  other  words,  whenever  a 
franchise  as  such  has  a  market  value,  it  is  generally  supposed 
that  this  value  is  a  creation  of  law.  This  view  is,  of  course, 
erroneous,  for  law  cannot  create  value.  Men  can  get  richer 
through  the  mere  operation  of  law  only  at  the  expense  of  other 
men  or  of  the  community.  What  was  said  in  regard  to  the 
nature  of  land  values  (329)  is  equally  true  as  regards  the 
value  of  franchises. 

It  has  been  the  practice  to  grant  franchises  for  periods 
of  99,  or  even  999  years,  notwithstanding  that  our  descendants 
may  refuse  to  be  bound  by  our  extravagance  in  this  respect.  A 
number  of  these  franchises  have  attained  a  value  many  times 
exceeding  the  total  capital  invested  in  the  necessary  improve- 
ments. Some  even  now  return  an  annual  income  exceeding 
the  total  capital  really  invested,  and  are  likely  to  return  a 
constantly  increasing  revenue, 

A  franchise  once  granted  cannot  be  annulled  by  the  courts 
on  the  ground  that  it  was  injudiciously  granted,  without  resort- 
ing to  revolutionary  methods.     For  this  reason  the   power 


334]  EFFECTS  OF  CURRENCY  REFORM  455 

created  by  these  grants  is  viewed  with  serious  misgiving  by 
many  observers  who  realize  the  gravity  of  the  blunders  com- 
mitted in  giving  away  these  exclusive  rights.  Yet  these  rights 
are  not  any  more  detrimental  to  the  community  than  the 
present  sj-stem  of  land  ownership,  and  far  less  so  than  the 
present  currency  system,  under  which  there  is  created  what  is 
practically  a  monopoly  of  the  medium  of  exchange. 

The  injustice  to  the  public  interests  arising  from  improvi- 
dent grants  of  franchises  can  be  corrected  by  a  system  of 
taxation,  on  the  same  plan  on  which  the  land  question  may  be 
solved.  All  unearned  acquisition  through  public-service  rights 
may  thus  in  the  end  be  effectually  stopped.  A  tax  analogous 
to  the  land  tax  could  reasonably  be  assessed  on  the  value  of 
franchises,  the  owner  or  owners  to  report  the  value,  or,  if  the 
franchise  is  held  by  a  stock  company,  to  report  the  value  of  the 
stock,  with  the  proviso  that  any  bona  fide  offer  for  the  fran- 
chise exceeding  the  assessed  value  more  than,  say,  ten  per  cent. 
will  be  the  basis  of  a  new  assessment  within  the  ten  per  cent, 
of  the  offered  price.  If  a  two  per  cent,  tax  were  adopted,  our 
penalty  for  corrupt  or  shortsighted  grants  of  franchises  would 
then  be  reduced  to  a  quasi  public  debt  equalling  the  profits  due 
exclusively  to  the  franchise  itself  for  a  period  of  fifty  years. 

An  equitable  solution  of  the  currency  question  would  thus 
at  once  limit  the  harm  resulting  from  past  mismanagement 
of  public  trusts  and  at  the  same  time  put  an  end  to  the  acquisi- 
tion of  unearned  values  by  owners  of  land  and  holders  of 
franchises. 


CHAPTER  XVIII 

OLD  PROBLEMS  IN  A  NEW  LIGHT 

335.  Diagnosis  of  the  Economic  Disorder. — The  task  of 
a  physician  in  treating  a  patient  is  of  a  threefold  nature.  He 
has  first  to  examine  the  patient's  condition  to  learn  the  symp- 
toms by  which  the  disorder  manifests  itself.  On  the  basis  of 
this  information  he  then  determines  the  source  of  the  trouble, 
and  finally  he  prescribes  the  remedy  in  accordance  with  his 
diagnosis.  If  his  treatment  is  to  work  a  cure,  he  must  make 
sure  that  his  diagnosis  is  correct,  for  unskilled  experimenting 
might  be  the  undoing  of  the  patient. 

Just  as  symptoms  of  congestion  of  one  organ,  or  emaciation 
of  another,  point  to  a  diseased  condition  of  the  patient's 
system,  so  the  accumulation  of  enormous  wealth  in  the  hands 
of  a  few,  while  vast  numbers  of  the  real  wealth  producers 
obtain  but  a  bare  subsistence,  and  in  times  of  industrial  stag- 
nation face  even  the  lack  of  that,  points  to  a  similar  morbid 
condition  of  the  economic  system.  Whatever  course  of  treat- 
ment is  to  be  undertaken  to  cure  the  ills  of  the  body  social 
must,  as  in  the  case  of  the  body  physical,  be  based  on  a  rational 
examination,  lest  the  "cure  be  worse  than  the  disease." 

The  strictly  deductive  line  of  investigation  pursued  in  the 
foregoing  pages  has  consistently  led  us  to  the  conclusion  that 
the  underlying  cause  of  the  economic  disorder  is  the  legalized 
restriction  of  the  right  to  use  credit  as  a  medium  of  exchange, 
a  conclusion  which,  though  confirmed  by  all  the  symptoms  of 
the  social  disease,  is  not  in  agreement  with  the  accepted  tenets 
of  the  modern  school  of  economics.  According  to  these  tenets 
money  and  capital  are  justly  entitled  to  pure  interest,  although 
all  of  the  several  theories  on  which  this  claim  is  based  are 
controvertible.  According  to  one  theory,  wealth  employed  in 
the  processes  of  production  earns  a  share  of  the  proceeds  by 
the  assistance  it  renders  to  labor.  According  to  another,  the 
reluctance  of  men  to  save  what  they  have  produced,  in  order 
456 


335]  OLD  PROBLEMS  IN  A  NEW  LIGHT  457 

to  use  it  for  purposes  of  further  production,  can  be  overcome 
only  through  the  pajonent  of  a  recompense.  According  to  a 
third,  future  goods  are  underrated  as  compared  with  the 
present,  and  the  waiting  attending  the  growth  of  future  into 
present  goods  is  rewarded  by  a  corresponding  "agio"  or  in- 
crease. Labor's  recompense  is  supposed  to  be  subject  to  an 
economic  law  which  causes  it  to  tend  to  the  minimum  neces- 
sary for  subsistence.  Books  upon  books  are  written,  and 
theories  of  wages  and  theories  of  interest  are  invented  in  the 
attempt  to  prove  that  things  cannot  be  otherwise  than  they 
are.  Sociologists  in  the  halls  of  learning  are  teaching,  and 
legislators  in  congresses  and  parliaments  are  formulating  into 
law,  the  misconceptions  of  economic  principles  and  the  misin- 
terpretations of  economic  history  which  have  come  down  to 
us  from  the  past.  The  economic  disorder  which  becomes 
manifest  as  business  stagnation  is  variously  diagnosed  as  due 
to  overproduction,  to  speculation,  to  bad  investments,  to 
hoarding  of  money,  to  tinkering  with  tariff  laws,  to  an  undue 
expansion  of  credit,  to  loss  of  confidence,  to  extravagance,  and 
to  any  and  every  other  imaginable  cause.  Industrial  depres- 
sion, with  its  attendant  evil  of  widespread  enforced  idleness, 
is  regarded  by  not  a  few  serious  thinkers  as  an  unavoidable 
incident  of  industrial  progress.  By  others,  again,  the  avarice 
of  employers  is  regarded  as  the  ultimate  cause  of  low  wages, 
and  under  this  misconception  workmen  are  urged  to  organize 
in  order  to  overcome  this  supposed  avarice  by  ' '  collective  bar- 
gaining" and  to  enforce  their  demands  by  means  of  strikes 
and  boycotts.  Still  others  hold  that  the  existing  system  of 
land  tenure  is  the  principal  cause  of  economic  injustice  and 
see  in  the  reform  of  that  system,  through  taxing  land  to  the 
extent  of  the  entire  rent,  a  cure  for  the  poverty  of  the  masses. 
There  are  also  many  who  look  upon  competition  as  the  one 
great  bane  of  the  social  system,  to  remove  which  it  is  proposed 
to  "socialize"  all  processes  of  industry  and  commerce  under  a 
system  of  communal  ownership  of  all  means  of  production. 

Whether  the  present  currency  system,  which  we  have  found 
to  be  the  seat  of  the  social  cancer,  is  ])ased  on  rational  or  irra- 
tional theories,  whether  the  laws  which  put  them  in  practice 


458  CONCLUSIONS  [336 

are  just  or  unjust,  the  fact  remains  that  these  theories  are 
generally  regarded  as  true  and  the  laws  as  proper  and  right. 
Just  as  the  slave  accepted  his  condition  as  a  matter  of  course, 
just  as  the  serf  of  the  feudal  ages  bowed  submissively  to  the 
laws  which  constrained  his  liberty,  just  as  the  people  of  the 
Orient,  and  in  a  measure  those  of  contemporary  Europe,  re- 
gard the  differences  of  caste  as  being  in  the  natural  order  of 
things,  so  is  governmental  restriction  of  the  medium  of  ex- 
change looked  upon  as  a  measure  necessary  to  protect  its  value. 
Our  investigation,  however,  has  made  it  plain  that  through 
the  operation  of  this  restriction,  enforced  by  law,  industry 
and  commerce  are  subjected  to  an  exaction  as  arbitrary  and 
unjust  as  that  imposed  in  the  middle  ages  by  robber  barons  on 
merchants  passing  their  strongholds.  The  modem  way  of 
collecting  this  impost  is  more  subtle,  more  refined  than  that 
of  former  times,  but  the  result,  the  acquisition  of  unearned 
revenues  by  some  at  the  expense  of  others,  is  as  indefensible  in 
the  one  case  as  in  the  other. 

336.  Capital  Not  Productive. — Physicists  have  long  recog- 
nized the  impossibility  of  devising  a  "perpetual  motion." 
Chemists  no  longer  seek  for  a  "philosopher's  stone."  But  in 
the  field  of  economics  capital  is  yet  supposed  to  have  the 
power  to  propagate  itself  through  the  operation  of  natural 
causes,  notwithstanding  that  a  self-creating  power  of  capital 
is  inconceivable.  The  fact  is  that  the  apparent  power  of 
capital  to  grow  is  really  a  power  to  acquire  an  unearned  share 
of  the  results  of  labor  performed  by  those  who  work. 

The  human  race  cannot  continue  to  consume  more  than  is 
produced.  It  follows  that  no  one  individual  can  consume 
more  than  he  produces,  unless  some  one  else  produces  more 
than  he  consumes.  Yet  it  is  taken  as  a  matter  of  course  that 
wealth,  once  acquired,  returns  a  continuous  income. 

Suppose  a  man  to  work  until  he  is  50  years  old  and  to 
produce  wealth,  all  told,  amounting  to  $40,000.  Suppose  that 
during  this  time  he  consumes  the  equivalent  of  $20,000  and. 
on  retiring,  invests  his  savings  of  $20,000  at  the  rate  of  5  per 
cent.    Suppose,  furthermore,  that  the  yearly  income  from  this 


336]  OLD  PROBLEMS  IN  A  NEW  LIGHT  459 

investment,  amounting  to  $1000,  supplies  his  subsequent  needs, 
and  that  he  dies  when  75  years  old,  leaving  the  principal  of 
$20,000  to  his  heirs.  Summing  up,  this  man  will  have  pro- 
duced wealth  to  the  amount  of  $40,000,  and  after  using  up 
$20,000  before  he  retires  and  $25,000  after  that,  a  total  of 
$45,000,  there  is  still  left  $20,000  to  be  shared  among  his  heirs. 

Existing  economic  conditions  have  enabled  him  to  acquire 
$25,000  more  than  he  produced.  How  did  this  come  about? 
That  capital  has  no  creative  power  and  therefore  cannot  add 
value  to  itself  has  been  amply  demonstrated  in  our  previous 
analysis  (191-194,  257-267).  The  inevitable  conclusion  is 
that  the  $25,000  received  by  him  in  excess  of  what  he  has 
produced  represents  wealth  produced  by  others  who,  by  the 
existing  economic  conditions,  were  deprived  of  it. 

In  this  way  many  receive  unearned  incomes  through  the 
power  of  money.  The  fact  that  most  of  these  are  at  the  same 
time  employed  in  productive  pursuits  and  thus  obtain  earned 
wages  as  well  as  unearned  gains  only  serves  to  obscure  the 
fact  that  their  capital  profits  are  unearned. 

It  must,  however,  not  be  left  out  of  sight  that  the  owners 
of  capital  cannot  be  held  individually  responsible  for  these 
conditions,  except  in  so  far  as  they,  as  members  of  the 
community,  are  responsible  for  the  perpetuation  of  the  exist- 
ing inequitable  monetary  system  (267).  It  is  the  system 
which  is  at  fault,  and  no  altruistic  capitalist,  nor  any  number 
of  them,  can  do  more  than  sporadically  alleviate  the  evil 
effect  of  the  system.  While  the  practice  of  the  "Golden  Rule" 
may  result  in  ameliorating  conditions  here  and  there,  it  cannot 
stay  the  recurrence  of  financial  crises  and  the  consequent 
industrial  and  commercial  disturbances. 

In  our  various  references  to  the  ''efficiency"  or  "pro- 
ductivity" of  capital  there  would  appear  to  be  implied  the 
assumption  that  capital  in  and  for  itself  is  productive.  The 
fact  that  capital  brings  an  income  to  its  owner  appears  to 
afford  an  all-sufificient  basis  for  that  assumption.  But  our 
investigation  has  led  us  to  the  conclusion  that  the  power  of 
capital  under  existing  conditions  to  command  a  profit  for  it- 
self is  not  traceable  to  any  quality  or  faculty  inherent  in  it, 


460  CONCLUSIONS  [337. 338 

but  to  extraneous  conditions,  namely,  to  restrictions  placed  on 
the  freedom  of  exchange.  It  is  through  these  restrictions  that 
money  is  given  the  power  to  impose  a  toll  on  exchange  and 
that  capital  acquires  the  power  to  impose  a  toll  on  production. 
If  capital  were  really  productive,  we  would  let  capital  do  all 
our  producing  and  so  escape  the  necessity  of  doing  any  kind 
of  work. 

337.  The  "  Almighty  "  Dollar. — Since  money  and  wealth 
have  the  power  to  bring  to  their  owner  a  perpetual  income,  it 
is  not  surprising  that  the  desire  for  wealth  is  uppermost  in  the 
minds  of  all,  with  the  exception,  perhaps,  of  here  and  there 
some  altruistic  idealist.  The  idea  that  the  power  to  earn 
interest  is  a  natural  attribute  of  money  and  of  capital  is  so 
thoroughly  rooted  in  the  minds  of  men  that  it  is  generally 
accepted  as  a  matter  of  course.  Everyone  is  striving  to  obtain 
a  "competency,"  and  only  few  stop  to  analyze  this  power  of 
money  and  to  trace  it  to  its  ultimate  cause.  The  influence  of 
this  peculiar  power  permeates  our  entire  social  system,  and  the 
worship  of  money  manifests  itself  in  all  details  of  every-day 
life.  When  a  merchant  sells  his  goods,  he  exchanges  with  his 
customer  equivalent  for  equivalent ;  yet  when  he  is  handed 
that  equivalent  in  money,  he  is  by  custom  impelled  to  acknowl- 
edge its  receipt  with  a  humble  "thank  you,"  although,  in 
point  of  fact,  the  purchaser  has  more  reason  to  be  thankful, 
inasmuch  as  the  merchant  supplies  some  particular  product 
which  his  customer  wants  and  in  return  accepts  a  mere 
certificate  of  credit. 

338.  The  Concentration  of  Wealth. — The  singular  power 
of  money,  without  which  neither  economic  rent,  nor  capital 
returns,  nor  pure  interest  could  be  acquired  b}'  the  owners 
of  land,  of  capital  goods  or  of  money,  is  directly  responsible 
for  the  tendency  of  wealth  to  become  concentrated  in  the 
possession  of  a  comparatively  small  class  of  the  community. 
Bacon  already  observed  this  tendency,  for  he  characterizes 
usury  as  that  which  "bringeth  the  treasure  of  the  realm  into 
few  hands." 

"We  have  already  described  (244—255)  how  it  comes  about 
that  the  indebtedness  of  the  industrial  to  the  financial  world 


338]  OLD  PROBLEMS  IN  A  NEW  LIGHT  461 

is  constantly  increasing  and  how  numerous  business  under- 
takings are  gradually  forced  toward  bankruptcy.  This  proc- 
ess is  a  slow  one,  to  be  sure,  and  only  comparatively  few  con- 
cerns become  seriously  involved,  but  the  fact  remains  that  the 
process  is  continually  going  on,  carrying  one  business  after 
another  to  the  brink  of  bankruptcy,  and  not  a  few  of  them 
over  it. 

Some  of  these  concerns,  especially  if  extensive  and  normally 
prosperous,  are  saved  from  extinction  through  "reorganiza- 
tion," and  in  that  case  "financiers"  generally  gain  control. 

Owing  to  the  restraint  enforced  through  the  existing  cur- 
rency and  banking  laws,  banks  are  unable  to  supply  all  the 
facilities  of  exchange  normally  required  for  the  conduct  of 
business,  and  it  is  quite  natural  that  those  concerns  which 
come  into  the  control  of  banking  interests  are  favored.  The 
brunt  of  the  system  therefore  falls  most  heavily  on  those  who 
are  not  identified  with  financial  agencies,  and  who,  having  to 
work  without  adequate  facilities  of  exchange,  are  handicapped 
in  competition  and  are  finally  driven  from  the  field.  The 
inability  of  such  concerns  to  hold  their  ground  is  generally 
attributed  to  the  operations  of  the  financed  concerns  which 
go  under  the  name  of  "trusts"  and  which  are  supposed  to 
gain  or  to  seek  a  monopoly  power  by  "pushing  their  com- 
petitors to  the  wall."  This,  however,  is  simply  a  phase  of 
the  process  by  which  wealth  is  concentrated  and  through  which 
the  most  important  industries  gradually  pass  into  the  control 
of  a  comparatively  few  "captains  of  finance"  (275,  364). 

The  so-called  "trusts"  are  accordingly  the  natural  and 
inevitable  outcome  of  the  money  monopoly.  They  are  usually 
regarded  as  being  themselves  monopolies,  or  attempts  at 
monopoly,  but  they  cannot  properly  be  classed  as  such,  except 
as  they  are  in  possession  of  special  privileges.  Apart  from 
such  privileges  they  are  not  legally  protected  against  com- 
petition in  their  respective  fields,  but  rather  the  contrary^ 
and  if  they  develop  monopolistic  power,  they  obtain  it  in- 
directly through  their  ownership  or  control  of  money  or  of 
land,  especially  mineral  lands,  or  both.  The  oppressive  power 
of  "trusts"  has  its  ultimate  source  and  stronghold  in  the 


462  CONCLUSIONS  [339. 340 

money  monopoly,  and  only  with  the  ending  of  that  monopoly 
will  those  trade  combinations  which  now  wield  a  power  akin 
to  monopoly  lose  this  power. 

339.  Efforts  to  Curb  the  Concentration  of  Wealth. — The 
steady  growth  of  enormous  fortunes  in  the  hands  of  a  com- 
paratively few  individuals,  which  has  become  so  marked  a 
feature  of  our  industrial  system,  has  come  to  be  regarded  with 
apprehension  lest  the  continuance  of  this  growth  lead  to  in- 
tolerable conditions.  Out  of  this  apprehension  has  arisen  a 
disposition  to  counteract  this  growth  through  legal  measures. 
Although  the  idea  of  definitely  limiting  the  wealth  of  in- 
dividuals, while  not  without  advocates,  is  nowhere  seriously 
entertained,  methods  having  the  same  tendency,  such  as  gradu- 
ated inheritance  and  income  taxes,  have  been  enacted  into  law. 

Such  measures  are,  however,  inadequate  to  establish  justice 
or  to  prevent  the  accumulation  of  unearned  fortunes.  Gradu- 
ated taxation  is  imposed  equally  upon  wealth  acquired  through 
labor  and  upon  that  acquired  through  the  operation  of  unjust 
laws.  On  the  one  hand  such  taxation  penalizes  industry  and 
thrift,  while,  on  the  other,  it  recovers  only  a  small  share  of  the 
unearned  incomes.  Moreover,  this  share  goes  to  the  com- 
munity without  affording  redress  to  those  who  have  been 
deprived  of  the  full  fruit  of  their  labor. 

340.  Corporation  and  Bankruptcy  Laws. — Statistics  show 
that  a  very  large  percentage  of  all  business  undertakings  meet 
with  failure  within  the  first  one  or  two  decades  of  their  ex- 
istence. Of  these  failures  some  are  doubtless  due  to  misjudg- 
ment  or  incompetency.  Others  are  due  to  losses  sustained 
through  unforeseen  causes,  and  a  number  are  fraudulent.  But 
over  and  above  all  these  there  is  a  long  and  continuous  list  of 
business  failures  which  are  due  to  the  general  financial  stress 
(255).  Numerous  concerns  which  are  staggering  under  the 
burden  imposed  on  industry  by  the  faults  of  our  financial 
system  are  precipitated  into  bankruptcy  through  no  fault  of 
theirs,  but  through  the  disastrous  working  of  that  system. 

It  has  been  in  recognition  of  the  blamelessness  of  such 
bankrupts  that  laws  imposing  imprisonment  for  debt  have 
been  abolished,  and  in  their  place  provision  has  been  made 


341]  OLD  PROBLEMS  IN  A  NEW  LIGHT  463 

for  the  release  of  bankrupts  from  all  debt  remaining  after 
bankruptcy  proceedings  have  been  consummated.  And  if  an 
incorporated  company  becomes  bankrupt,  the  claims  of  its 
creditors  are  limited  to  the  actual  assets  of  the  corporation. 
By  virtue  of  this  limitation  the  claims  of  creditors  cannot  be 
extended  to  the  individual  members  of  the  corporation,  and 
the  creditors  lose  more  or  less  of  their  claims,  notwithstanding 
that  the  individual  members  of  the  company  may  be  possessed 
of  ample  wealth. 

Such  protection  is  apt  to  be  abused.  It  presents  a  tempta- 
tion to  the  undertaking  of  speculative  ventures  whose  pro- 
moters have  everything  to  gain  from  success,  while  in  the 
event  of  failure  the  loss  falls,  at  least  in  part,  on  others. 
Although  the  intent  of  the  law  is  good,  it  has  the  effect  of 
affording  undue  protection  to  unscrupulous  men. 

A  reform  of  the  money  system  that  would  permit  sound 
business  credit  to  be  monetized  without  the  inequitable  tribute 
of  pure  interest  (246-255)  would  result  in  a  condition  where 
no  business  man  entitled  to  credit  need  lack  money.  A  delay 
in  the  pajonent  of  accounts  would  be  clear  evidence  that  the 
debtor  is  not  entitled  to  further  trust.  Inasmuch  as  the  same 
reform  would  remove  the  present  incubus  on  business,  the 
temptation  to  take  risks  in  selling  goods  on  credit  would  be 
lessened,  and  unpaid  accounts  would  not  pile  up  as  now  (312, 
314).  Thus  the  one  great  cause  of  bankruptcies  would  be 
removed,  and  the  legalized  limitation  of  liabilities  would  no 
longer  be  found  necessary  for  the  protection  of  legitimate 
business. 

341.  Public  Debts. — When  interest-bearing  public  debts 
are  contracted,  it  is  generally  held  that  the  borrowed  money 
should  be  used  only  for  permanent  improvements,  and  that 
all  current  public  requirements  should  be  covered  by  taxation. 
Inasmuch  as  permanent  improvements  will  inure  to  the  benefit 
of  succeeding  generations,  it  seems  proper  that  they  should 
bear  a  share  of  the  cost  of  the  work,  and  it  is  generally  sup- 
posed that  through  going  into  debt  for  the  improvements 
and  leaving  it  for  posterity  to  pay  the  debt,  we  make  them 


464  CONCLUSIONS 


[341 


bear  a  share  of  that  cost.    But  when  critically  examined,  this 
supposition  is  found  to  be  a  mistake. 

One  thing  is  certain.  We  cannot  in  any  way  make  pos- 
terity help  us  to  do  the  work  of  making  those  improvements. 
Such  public  property  as  national  defences,  roads,  bridges, 
waterworks,  public  buildings,  sewers,  etc.,  must  be  completed 
before  we  ourselves  can  reap  any  benefit  from  them,  and  the 
future  generations  cannot  help  us  to  complete  them. 

If,  then,  they  cannot  lend  us  any  help  in  this  direction, 
in  what  other  way  can  we  make  them  assist  us  ?  Can  we  really 
do  so  by  going  into  debt  ? 

Posterity  inherits  from  preceding  generations  all  wealth 
which  these  have  produced  over  and  above  that  which  was 
consumed  or  destroyed ;  no  more,  no  less.  Debts  transmitted 
cannot  affect  the  total  inheritance  of  succeeding  generations 
for  the  simple  reason  that  the  inheritance  includes  the  credits 
as  well  as  the  debts,  and  the  sum  of  all  credits  necessarily 
equals  the  sum  of  all  debts.  And  if  the  future  generation 
gets  from  its  predecessor  neither  more  nor  less,  whether  or 
not  it  inherits  a  public  debt,  it  would  seem  that  the  present 
generation  can  in  no  way  be  benefited  by  incurring  such  a 
debt. 

"When  public  improvements  are  undertaken,  as  when  a 
system  of  sewers  is  being  built,  the  workers  must  be  com- 
pensated for  their  services,  and  this  is  ordinarily  done  with 
money.  This  money  can  be  obtained  by  the  community  in 
three  different  ways:  (1)  through  taxation;  (2)  through  the 
creation  of  a  funded  debt — by  an  issue  of  bonds;  and  (3) 
through  the  creation  of  an  unfunded  debt — by  the  issue  of 
currency  notes. 

If,  in  the  first  place,  the  money  is  raised  by  taxation,  and 
the  taxpayers  are  determined  to  let  a  future  generation  ''do 
the  paying,"  they  must  create  debts  to  be  paid  by  the  future 
generation,  and  this  they  can  only  do  by  individually  borrow- 
ing the  money  required  and  securing  the  debts  by  their 
property.  The  improvements  paid  for  by  the  taxes  so  raised 
become  the  property  of  the  community,  while  the  correspond- 
ing debit  stands  against  the  property  of  the  taxpayers. 


341]  OLD  PROBLEIMS  IN  A  NEW  LIGHT  465 

If,  in  the  second  place,  the  money  is  raised  through  an 
issue  of  bonds,  the  improvements  become  the  property  of  the 
community,  while  the  public  bonded  debt  constitutes  a  cor- 
responding debit  against  the  property  of  the  taxpayers. 

If,  in  the  third  place,  the  money  is  obtained  through  an 
issue  of  currency  notes  instead  of  bonds,  the  improvements 
become  the  property  of  the  community,  while  the  notes  emitted 
by  the  government  constitute  a  corresponding  debit  against 
the  property  of  the  taxpayers. 

This  shows  that  in  either  ease  the  taxpayers  contract  a 
debt  equal  to  the  cost  of  the  improvements.  In  this  respect 
the  result  is  the  same  in  the  three  cases.  But  in  respect  to 
the  interest  involved  there  is  a  marked  difference. 

In  the  first  case  it  is  the  taxpayers  individually  who  must 
pay  the  interest  on  their  respective  shares  of  the  debt. 

In  the  second  case  it  is  the  community  as  a  whole  which 
pays  the  interest  on  the  debt,  but  inasmuch  as  interest  on 
public  debts  is  one  of  the  current  public  requirements,  the 
money  to  pay  it  must  be  obtained  through  taxation.  It  fol- 
lows that,  as  in  the  first  case,  the  interest  is  i3aid  by  the  tax- 
payers. 

In  the  third  case,  however,  the  payment  of  interest  falls 
away  altogether. 

The  notion  that  we  can  make  our  descendants  pay  for 
public  improvements  and  thereby  make  it  easier  for  ourselves 
is  due  to  the  lack  of  a  proper  understanding  of  the  nature  of 
money.  We  have  found  that  there  is  a  distinction  between  an 
economic  cancellation  and  a  legal  payment  of  a  debt  (75,  95). 
An  economic  cancellation  embraces  the  delivery  of  actual 
wealth,  while  a  legal  payment  of  a  debt  is  not  a  cancellation 
at  all,  but  consists  in  giving  one  credit  instrument  for  another 
one.  Even  the  payment  of  a  debt  with  gold  coin  is  not  a 
cancellation  of  the  debt,  unless  the  recipient  intends  using 
the  metal  of  the  gold  coin  as  such.  If  he  does  not  do  so,  if  he 
subsequently  expends  the  coin  as  money,  he  uses  it  in  its 
capacity  as  a  credit  instrument  of  which  the  gold  is  merely 
a  collateral  security,  as  an  instrument  conveying  a  claim  to 
merchandise,  and  not  as  merchandise  itself. 
30 


466  CONCLUSIONS  [341 

Inasmuch  as  public  debts  are  payable  in  money,  they  are 
payable  in  credit  instrimients.  Money  represents  an  acknowl- 
edgment of  debt  which  is  accepted  as  money  by  virtue  of  a 
communal  agreement.  And  there  is  no  reason,  outside  of  our 
unreasonable  banking  laws,  why  monetized  public  credit, 
adequately  assured  and  redeemable  in  gold,  should  not  be 
used  in  place  of  the  monetized  credit  of  some  banker  in  mak- 
ing payments  for  public  improvements  as  the  sundry  pay- 
ments become  due  during  the  progress  of  the  work.  If  cur- 
rency notes  issued  on  public  credit  were  used  for  such  pay- 
ments instead  of  the  money  borrowed  on  interest-bearing 
bonds,  the  debt  would  readily  be  carried  by  the  public  in  the 
form  of  a  medium  of  exchange  without  interest. 

When,  as  is  now  the  practice,  public  improvements  are 
financed  through  the  creation  of  an  interest-bearing  debt,  the 
interest  is  not  paid  for  any  actual  service  of  the  financiers,  but 
merely  because  the  community  has  placed  artificial  obstruc- 
tions in  the  way  of  the  process  of  exchange  (264).  The  pay- 
ment of  interest  does  not  arise  from  economic  exigencies,  but 
only  from  artificial  conditions  created  by  law. 

Whenever  the  proposition  is  advanced  to  save  the  payment 
of  the  interest  charge  on  public  debts  by  monetizing  the 
public  credit  through  the  issue  of  currency  notes,  the  cry  of 
"inflation"  and  "fiat  money"  is  raised  (320),  and  the  attend- 
ing increase  of  exchange  facilities  is  branded  as  a  danger  to 
industry  and  commerce.  The  issue  of  non-interest-bearing 
currency  is  condemned  on  the  basis  of  a  supposed  danger  of 
an  over-supply  of  money,  and  on  the  plea  that  government 
should  not  go  into  the  banking  business,  as  that  would  mean 
socialism,  but  should  leave  that  to  private  enterprise.  The 
issue  of  interest-bearing  bonds  is  accordingly  urged  as  the 
only  safe  alternative.  Furthermore,  it  is  often  insisted  that 
whenever  a  government  issues  bonds,  they  should  be  sold  for 
"real  money,"  namely,  gold,  and  not  for  "money  substitutes." 
It  is,  however,  a  fact  that  bonds  have  all  along  been  sold  for 
money  other  than  gold,  and  there  is  no  cogent  reason  for  in- 
sisting on  gold  at  any  time.  Stamped  pieces  of  gold  used  as 
money  offer  no  advantage  whatever  over  sound  credit  cur- 


342]  OLD  PROBLEMS  IN  A  NEW  LIGHT  467 

rency.  "When  governments  issue  bonds,  they  tlo  so  because 
they  are  in  need  of  money  for  purposes  of  payment,  and  since 
any  valid  credit  monetized  through  the  issue  of  currency  notes, 
if  fully  secured  and  regularly  redeemable  in  gold,  serves  in 
the  channels  of  exchange  the  same  purpose  as  gold  coin,  there 
is  no  reason  for  the  discrimination.  Money-lenders  demand 
the  same  amount  of  interest,  whether  they  loan  ' '  real  money, ' ' 
"money  substitutes,"  or  only  "bank  credit."  In  their  deal- 
ings with  borrowers  they  make  no  distinction  between  the 
various  forms  of  the  medium  of  exchange.  AVhy,  then,  should 
it  be  assumed  that  the  government  must  have  gold  for  the 
purpose  of  paying  its  obligations?  Gold  is  needed  only  for 
the  purpose  of  redemption,  and  currency  issued  on  the  same 
credit  as  that  on  which  bonds  are  now  issued  must  of  course 
be  as  good  as  the  bonds.  If  currency  were  issued  in  place  of 
interest-bearing  bonds,  the  small  amount  of  gold  requisite  to 
make  these  notes  redeemable  in  bullion  could  be  obtained  by 
the  government  from  the  same  source  from  which  bankers  now 
obtain  it.  There  is  clearly  no  excuse  for  the  issue  of  interest- 
bearing  government  bonds.  As  a  matter  of  fact,  there  is  not 
even  any  real  necessity  for  monetizing  the  public  credit  as 
suggested  above.  If  we  had  a  system  of  currency  free  from 
needless  limitations  imposed  by  law,  the  public  income  from 
the  land  tax  (288,  333)  would  fully  suffice  for  all  public 
requirements,  including  the  costs  of  permanent  improvements, 
hence  there  would  be  no  occasion  for  incurring  public  debts 
of  any  kind  whatsoever. 

342.  The  Strife  of  Competition. — There  is  a  prevailing 
idea  that  it  is  competition  which  makes  it  so  difficult,  and 
frequently  impossible,  for  a  small  business,  however  capably 
it  may  be  conducted,  to  maintain  itself  in  the  market  along- 
side larger  competitors.  Competition  is  sometimes  likened  to 
warfare  in  which  those  engaged  in  business  strive  for  the 
mastery,  the  defeated  being  compelled  to  give  up.  But  com- 
petition, in  and  by  itself,  cannot  have  a  destructive  effect. 
Under  natural  conditions  a  capable  but  small  competitor 
ought  to  be  able  to  obtain  his  due  share  of  the  market,  and 


468  CONCLUSIONS  [343 

where  and  when  this  is  not  the  ease,  we  must  look  to  find  the 
cause  that  produces  this  effect.  The  following  homely  example 
will  be  found  fully  to  confirm  a  number  of  our  deductions. 

343.  Competition  in  a  Moneyless  Community. — Let  us 
imagine  a  primitive  community  in  which  simple  barter  answers 
all  the  purposes  of  exchange,  and  in  which  a  medium  of  ex- 
change is  as  yet  unknown.  In  such  a  community  the  principal 
products  would  doubtless  be  things  to  eat  and  things  to  wear, 
and  our  attention  may  therefore  be  concentrated  on  two 
classes  of  producers:  the  makers  of  bread  and  the  makers  of 
clothes.  For  the  sake  of  argument  let  us  assume  that  the 
effort  required  in  making  a  set  of  apparel  is  as  much  as  the 
effort  of  making  500  loaves  of  bread,  and  that,  accordingly, 
through  the  operation  of  competition,  500  loaves  will  normally 
exchange  for  one  set  of  apparel. 

Suppose  now  that  the  more  ambitious  tradesmen  get  the 
notion  that  through  underbidding  their  fellow  tradesmen 
they  can  do  more  business,  and  that  smaller  profits  on  bigger 
business  bring  more  wealth.  Some  of  the  bakers  would  accord- 
ingly offer,  say,  550  loaves  of  bread  for  a  suit  of  clothes,  and 
others,  apprehending  a  loss  of  trade,  would  fall  in  line  and  do 
likewise.  But  a  similar  rivalry  must  be  supposed  to  spring 
up  among  the  tailors  also.  Imagine  one  of  the  tailors  to  under- 
bid the  others  by  offering  a  suit  of  clothes  for,  say,  450  loaves, 
and  the  others  to  follow  his  example  for  fear  of  losing  custom. 
We  would  then  have  the  spectacle  of  the  tailors  offering  a 
suit  of  clothes  for  450  loaves,  while  the  bakers  insist  upon 
giving  550.  Such  competition  is,  of  course,  unthinkable,  nor 
does  it  illustrate  the  process  by  which,  in  the  real  world,  even 
capable  competitors  are  eliminated  from  the  field.  "What  is 
there,  then,  in  industrial  competition  that  has  this  effect? 

It  may  be  held  that  competition  is  destructive  only  to  the 
less  capable  competitors.  If  that  were  the  case  both  the  bakers 
who  cannot  make  bread  as  fast  or  as  good  as  others,  and  the 
tailors  who  are  slower  and  less  skilled  than  others,  would  have 
to  get  out  of  business.  But  what  is  it  that  prevents  the  less 
skilled  of  both  trades  from  going  on  producing  and  exchanging 
their  products  to  the  extent  of  their  capacity  ? 


343]  OLD  PROBLEMS  IN  A  NEW  LIGHT  469 

It  is,  of  course,  plain  enough  that  conditions  may  arise 
which  prompt  underbidding-.  Suppose  that  in  our  primitive 
community  there  are  too  many  bakers  in  proportion  to  the 
tailors,  so  that  more  bread  is  made  with  a  view  of  getting 
clothes  than  there  are  clothes  being  offered  in  exchange  for 
bread.  Since  the  bakers  cannot  all  be  supplied  with  the 
clothes  they  want  for  their  bread,  they  wull  compete  among 
themselves  for  the  clothes,  and  the  price  of  bread  will  go 
down;  in  other  words,  550  instead  of  500  loaves  will  be  paid 
for  a  suit.  This,  of  course,  means  a  rise  in  the  value  of  clothes, 
the  tailors  having  in  this  case  no  reason  to  compete  against 
each  other.  But  since,  as  we  have  assumed,  it  takes  as  much 
labor  to  produce  a  suit  of  clothes  as  to  make  500  loaves  of 
bread,  the  tailor  trade  would  be  more  attractive  than  that  of 
baking,  and  the  most  versatile  of  the  bakers  would  learn 
tailoring  and  become  tailors.  Underbidding  among  the  tailors 
would  thereupon  begin,  and  a  readjustment  of  the  exchange 
rate  would  proceed  until  the  normal  ratio  of  500  to  1  is 
re-established. 

It  is  thus  apparent  that  competition  is  the  prime  factor  in 
the  process  by  which  the  relative  quantities  of  the  various 
things  produced  for  the  market  are  regulated  in  proportion 
to  the  demand,  and  their  exchange  rates  adjusted  to  corre- 
spond with  the  effort  required  in  their  production  (147). 

In  this  last  phase  of  our  illustration  we  had  assumed  that 
over-production  of  bread  is  coincident  with  under-production 
of  clothes.  But,  it  may  be  asked,  what  will  happen  if  both 
the  bakers  and  the  tailors  produce  more  goods  than  they  can 
dispose  of  ?  It  is  clear,  of  course,  that  the  bakers  would  have 
no  difficulty  in  exchanging  part  of  their  over-produced  bread 
for  part  of  the  over-produced  clothes,  resulting  in  both  bakers 
and  tailors  being  well  supplied  with  food  and  clothing;  in 
other  words,  all  would  be  rich  and  could  afford  to  stop  work 
for  a  time.  But  how  can  this  lead  to  either  of  them  being 
driven  out  of  the  market  ?  In  our  moneyless  community  com- 
petition could  never  degenerate  into  a  semblance  of  warfare 
through   which   competitors   are   driven   from   the   field   and 


470  CONCLUSIONS  [344 

deprived  of  their  chance  to  earn  a  livelihood.  Something  else 
than  competition  must  obviously  enter  into  the  problem. 

344.  The  Advent  of  Money. — This  moneyless  method  of 
trading  has  its  disadvantages.  When  a  tailor  sells  a  suit  of 
clothes  and  accepts  500  loaves  of  bread  in  exchange,  a  portion 
of  this  bread  will  become  stale,  and  some  will  perhaps  even 
spoil  before  it  can  be  consumed.  And  when  the  baker  needs 
a  suit  of  clothes,  he  must  work  day  and  night  to  produce  500 
fresh  loaves  for  the  occasion,  while  ordinarily  he  needs  but  a 
fraction  of  that  number  for  his  daily  requirements.  But  these 
disadvantages  are  not  insurmountable,  as  we  shall  presently 
see. 

One  of  the  townsmen  becomes  possessor  of  a  quantity  of 
silver  which,  by  reason  of  its  utility  for  ornaments,  is  highly 
prized  in  the  community,  A  part  of  this  he  cuts  into  pieces, 
some  large,  some  small.  The  small  ones  he  makes  of  such  a 
size  that  each  evenly  exchanges  for  a  loaf  of  bread,  and  calls 
them  dimes.  The  large  ones  he  makes  ten  times  as  heavy,  so 
that  50  of  them  will  buy  a  suit  of  clothes,  and  he  calls  them 
dollars. 

When  he  needs  bread  or  clothes,  he  offers  in  exchange  such 
silver  pieces,  which  both  bakers  and  tailors  readily  accept, 
seeing  that  they  can  make  similar  use  of  them  among  them- 
selves. When  the  tailor  wants  a  loaf  of  bread,  he  gives  a 
dime  piece  in  exchange  for  it  and  is  thus  easily  enabled  to  get 
fresh  bread  as  he  wants  it,  while  the  baker,  in  turn,  when  he 
wants  a  suit  of  clothes,  finds  the  tailor  ready  to  accept  50  of 
the  dollar  pieces  in  return.  The  silver  pieces  have  become  a 
medium  of  exchange — money. 

All  the  tradesmen  of  the  community  soon  realize  the  ad- 
vantages of  these  pieces  of  silver  as  a  medium  of  exchange, 
and  as  such  they  are  sought  after  by  all  who  have  things  to 
exchange.  Since,  however,  the  owner  of  the  silver  has  no 
occasion  to  use  more  than  a  small  portion  of  it  for  his  own 
purchases,  all  of  it  does  not  find  its  way  into  circulation,  and 
a  number  of  the  tradesmen  seek  to  borrow  some  of  the  silver 
from  its  owner.  Seeing  this  demand  for  his  silver,  he  offers 
to  lend  it  in  return  for  a  recompense,  the  amount  of  which 


344]  OLD  PROBLEMS  IN  A  NEW  LIGHT  471 

is  to  be  detennined  by  competition.  In  the  end  he  agrees  to 
give  it  over  to  the  borrowers  on  condition  that  they  return  it 
to  him  at  the  end  of  a  year,  with  the  addition  of  one  dime 
for  each  dollar  of  the  borrowed  silver. 

Let  us  suppose  that  after  supplying  the  demand  for  silver 
to  be  used  for  ornaments,  the  owner  of  the  silver  has  enough 
left  to  make  105,000  dollar  pieces.  The  greater  portion  of 
this  he  now  makes  up  into  pieces  of  that  size,  and  the  remainder 
into  dime  pieces.  Reserving  5000  dollars  for  his  own  use,  he 
proceeds  to  lend  out  the  balance.  Some  men  borrow  100  dol- 
lars, others  more,  others  less. 

During  the  year  the  lender  spends  his  5000  dollars,  giving 
some  of  it  in  alms  to  the  poor,  and  at  the  end  of  the  year  the 
entire  amount  of  coined  silver  is  in  circulation. 

The  borrowers,  finding  it  difficult  to  get  along  without 
money  in  their  business,  now  seek  renewal  of  their  loans.  This 
being  granted,  they  pay  nothing  more  than  the  stipulated 
recompense,  amounting  to  10,000  dollars.  This  leaves  them 
indebted  to  the  amount  of  100,000  dollars,  while  the  amount 
in  circulation  is  95,000. 

Of  his  income  the  lender  now  again  reserves  for  his  own 
use  5000  dollars  and  offers  the  other  5000  to  the  borrowers, 
who,  needing  as  much  as  before,  and  having  only  95,000,  all 
told,  are  glad  to  avail  themselves  of  the  offer  and  borrow  the 
tendered  sum  on  the  same  terms  as  before.  They  now  owe 
to  the  lender  105,000  dollars. 

When  the  second  year  expires  and  the  total  amount  of 
silver  is  again  in  circulation,  they  compensate  the  lender  for 
the  loan  of  105,000  dollars,  by  paying  him  10,500.  This  loaves 
only  94,500  in  circulation.  As  the  silver  pieces  have  now  be- 
come a  necessity,  the  borrowers  ask  for  a  renewal  of  the  old 
loans,  and  the  lender  not  only  agrees  to  this,  but  lends  out 
5500  of  his  income  in  addition,  retaining,  as  before,  5000 
(hillars  for  personal  expenses.  The  loans  now  amount  to 
110,500  dollars. 

This  process  continues.  In  the  course  of  each  year  the 
lender  expends  5000  dollars  of  his  income  and  lends  out  the 
remainder,  and  each  succeeding  year  his  claim  upon  the  com- 


472  CONCLUSIONS  [345 

munity  increases  more  rapidly,  so  that  during  the  eighteenth 
year  the  debts  owing  him  exceed  300,000  dollars,  although  all 
the  money  in  existence  is  not  more  than  105,000  (255). 

345-  The  Real  Battle-Ground. — The  lender  now  gives 
notice  that  at  the  end  of  the  year  he  desires  to  collect  one-half 
his  loans.  In  preparing  themselves  for  the  occasion,  the 
debtors  begin  to  retain  the  money  as  it  comes  into  their  hands, 
instead  of  spending  it,  and  even  turn  a  quantity  of  the  silver 
intended  for  ornaments  into  coin.  Although  the  total  amount 
of  money  is  thus  actually  increased,  it  gradually  disappears 
from  circulation.  The  war  of  competition,  as  we  know  it, 
now  sets  in.  But  it  is  evidently  a  competition  for  money 
(201).  In  this  struggle  the  only  recourse  open  to  the  debtors 
is  the  underselling  of  their  competitors.  The  bakers  offer  11 
loaves  for  a  dollar,  while  the  tailors  reduce  the  price  of  their 
suits  to  45  dollars  (273).  It  will  be  observed  that,  while  both 
bread  and  clothes  are  reduced  in  price,  their  relative  value 
remains  as  1  to  500,  or  nearly  so.  The  absurd  condition  which 
resulted  when  the  moneyless  community  was  seized  with  the 
spirit  of  underbidding  is  not  present  here.  We  have  not  here 
the  case  of  the  bakers  offering  more  bread  for  a  suit  of  clothes 
and  the  tailors  offering  to  take  less.  What  they  both  want 
now  is  silver,  the  only  thing  with  which  they  can  pay  their 
debts. 

It  will  be  observed  that  if  the  townsmen  had  originally 
agreed  to  pay  the  interest  with  the  produce  of  their  labor, 
namely,  with  bread  and  clothes  (244),  there  would  have  been 
no  occa.sion  to  increase  their  debts  in  the  effort  of  keeping  all 
money  in  circulation,  and  the  indebtedness  would  not  have 
grown  to  proportions  which  made  ultimate  payment  impossible. 
The  underselling  was  prompted,  not  by  a  demand  for  a  medium 
of  exchange,  but  by  the  demand  for  the  stipulated  means  of 
paying  debts.  Hence  the  fall  in  prices  was  not  due  to  the 
demand  for  money  for  purposes  of  exchange,  but  to  a  struggle 
to  escape  the  consequences  of  a  failure  to  meet  the  stipulated 
obligations. 

The  sequel  of  this  war  is  a  foregone  conclusion.  The  re- 
luctance to  part  with  money  and  its  withdrawal  from  circula- 


346]  OLD  PROBLEMS  IN  A  NEW  LIGHT  473 

tion  result  in  a  general  reduction  of  business,  and  consequently 
in  a  general  restriction  of  production.  And  when  the  time  of 
settlement  is  at  hand,  there  being  not  enough  silver  in  ex- 
istence to  meet  even  one-half  the  obligations  of  the  debtors, 
many  must  fail  (255) . 

346.  Significance  of  the  Illustration. — The  main  features 
presented  by  our  illustration  have  their  parallels  in  the  actual 
Avorld,  Bank  note  currency,  like  the  silver  pieces  of  our  com- 
munity, gets  into  circulation  mainly  through  loans  on  which 
interest  must  be  paid,  and  bank  credit  is  issued  in  the  same 
way. 

As  shown  in  our  illustration,  these  loans  gradually  and 
persistently  grow  through  the  addition  of  interest,  and  since 
this  has  been  going  on  through  generations  past,  the  sum- 
total  of  loan  debts  now  exceeds  many  times  the  total  volume 
of  money.  An  indefinite  increase  of  the  volume  of  debt  is 
prevented  only  through  the  interminable  succession  of  busi- 
ness failures  which  is  so  constant  a  feature  of  the  commercial 
world  and  which  at  intervals,  when  the  volume  of  debt  has 
become  excessive,  are  precipitated  in  a  mass.  In  our  modem 
era,  competition,  which  normally  should  have  the  efiieet  of 
regulating  the  exchange  of  services,  is  transformed  into  a  con- 
tention for  the  means  of  exchange,  and  the  natural  course  of 
trade  is  distorted  into  a  scramble  for  money.  The  eagerness 
to  obtain  money  and  the  reluctance  to  part  with  it  have  be- 
come second  nature  to  us  all,  and  a  large  amount  of  effort 
that  should  go  to  production  is  wasted  in  hunting  for  trade. 

When  accumulated  debts  cause  an  excessive  demand  for 
means  of  payment,  all  possible  resources  are  drawn  upon  to 
obtain  these  means.  Under  this  pressure  all  available  money 
metal  is  turned  from  the  field  of  industry  into  the  field  of 
exchange.  The  point  V  of  Fig.  11  is  moved  toward  the  right, 
and  the  value  of  the  money  metal  rises.  This  explains  the 
fall  of  prices  during  periods  of  business  crises. 

However  critically  we  analyze  the  effects  of  free  compe- 
tition, only  salutarj^  results  can  be  traced  to  it.  When  com- 
petition is  characterized  as  destructive  (147),  it  is  because  of 
a  misunderstanding  of  its  essence.     The  war  of  competition 


474  CONCLUSIONS  [347 

is  a  fight  for  the  possession  of  something  the  production  of 
which  is  arbitrarily  restricted,  namely,  that  which  enables 
producers  to  exchange  the  fruit  of  their  labor.  In  short,  it  is 
a  struggle  for  freedom  to  do  business,  for  the  right  to  work. 
Not  competition  that  regulates  the  exchange  of  services,  but 
competition  for  the  only  means  through  which  such  exchange 
can  be  effected,  is  at  the  foundation  of  the  strife  that  now 
pervades  the  economic  world  (354). 

347.  The  Iron  Law  of  Wages. — Our  earlier  deliberations 
(151-162)  failed  to  show  the  causes  which  in  the  modern  in- 
dustrial world  decide  the  division  of  incomes  between  capital 
and  labor.  It  was  made  clear  that  competition  takes  no  part 
in  this  apportionment.  Later  (186-208)  we  found  that  the 
accepted  theories  of  capital  interest  are  defective  and  fail  to 
point  out  the  forces  which  govern  the  division.  Ultimately  it 
was  found  (236-267)  that  capital  obtains  its  power  to  acquire 
profits  for  its  owner  through  the  working  of  an  irrational 
currency  system  maintained  by  irrational  laws. 

Briefly  reviewed,  the  law,  by  restricting  the  production  of 
the  needed  medium  of  exchange,  obstructs  those  exchanges 
which  are  necessary  for  the  aggregation  of  capital  goods  as 
they  are  needed  in  the  process  of  production  (242),  with  the 
effect  of  keeping  down  the  amount  of  capital  in  productive 
use.  In  diagram  Fig.  18  it  has  been  graphically  shown  that 
if  the  capital  employed  is  limited  to  OC,  the  corresponding 
productivity  of  labor  employing  this  capital  is  represented  by 
the  area  OC'e'E,  which  is  less  than  the  natural  maximum 
productivity  OCE  of  this  same  labor.  Of  the  amount  so 
produced  the  portion  OC'e'i  accrues  to  the  owner  of  the  capital 
employed  (143),  leaving  to  the  active  agents  of  the  productive 
group  an  amount  represented  by  the  area  ie'E. 

If  exchanges  were  not  obstructed,  labor's  productivity 
would  rise  to  its  maximum  OCE,  of  which  no  portion  need  be 
paid  to  capital  as  pure  interest.  This  has  been  amply  demon- 
strated in  the  preceding  chapter.  It  follows  that  under 
present  conditions  labor  is  deprived  of  the  amount  C'Ce'  by 
being  unable  to  employ  the  most  efficient  mode  of  production 


348]  OLD  PROBLEMS  IN  A  NEW  LIGHT  475 

(158),  and  is  despoiled  of  the  share  OC'e'i,  which  amount  is 
given  to  capital  for  nothing  else  than  for  the  right  to  work 
(261).  These  losses  to  labor  can  be  avoided  through  rational 
currency  reform  (302-308). 

When  it  is  considered  that  under  the  reign  of  equitable 
laws  the  area  OCE  would  represent  wages,  while  under  present 
conditions  wages  are  represented  by  the  area  ie'E,  it  is  easy  to 
see  that  to-day  wages  equal  the  reduced  productivity  of  labor 
OC'e'E,  less  the  portion  OC'e'i,  which  is  diverted  from  wages 
and  improperly  allotted  to  capital  (358). 

348.  The  Employer's  Part  in  the  Process  of  Apportion- 
ment.— The  sharing  of  the  gross  income  of  a  group  is  effected 
by  the  employer.  Out  of  the  gross  income  he  pays  the  value 
AB,  Fig.  13,  of  all  services  contributed  by  other  groups;  the 
rent  BC  for  the  use  of  the  land  employed ;  the  interest  CE  for 
the  use  of  all  capital  goods  and  ready  money  needed;  and 
finally  the  wages  EF  of  the  employes,  retaining  for  himself  the 
residual  share  FG  as  his  wages. 

If  part  of  the  working  capital  has  been  obtained  through 
borrowed  money,  a  corresponding  share  DE  of  the  interest  CE 
accrues  as  money  interest  to  the  lender. 

The  share  AB  is  similarly  shared  out  by  the  several  groups 
who  receive  it ;  hence  the  value  of  the  final  consumption  goods 
is,  in  the  last  analysis,  divided  into  rent,  interest,  and  wages. 
When  consumption  goods  are  sold  in  the  market,  the  pur- 
chasers must  pay  a  price  that  comprises  rent,  interest,  and 
wages.  But  for  producing  these  goods  the  active  agents  of 
production  receive  only  wages.  When  they  collectively  buy 
back  their  own  productions,  they  must  pay  more  than  they  re- 
ceived for  producing  them.  It  is  by  this  process  that  the 
workers,  as  consumers,  furnish  the  unearned  incomes  of  land- 
lords, capitalists,  and  money-lenders.  They  clearly  recognize 
that  collectively  they  pay  for  the  things  they  buy  more  than 
what  they  collectively  have  received  for  producing  them.  As 
far  as  they  can  see,  the  employer  is  the  agent  intervening  be- 
tween the  producing  and  the  marketing.  It  is  therefore  not 
unnatural  for  the  workmen  to  come  to  the  conclusion  that  the 


476  CONCLUSIONS  [348 

employer  gets  the  excess  of  what  they  pay  for  the  things  over 
what  they  receive  for  producing  them. 

But  does  the  employer  as  such  really  get  the  items  of  rent 
and  interest,  or  any  part  of  them  ? 

Eent  arises  from  the  fact  that  the  amount  of  effort  neces- 
sary to  produce  and  bring  to  market  equal  quantities  of  a 
given  commodity  is  greater  or  less  according  as  these  are 
produced  on  more  or  less  fertile  land  or  on  land  more  or  less 
favorably  located.  Competition  for  the  possession  and  use 
of  the  different  degrees  of  advantage  thus  inherent  in  land 
enforces  on  the  employer  occupying  it  the  payment  of  rent 
(172-174,  371),  and  through  the  rent,  which  amounts  to  more 
or  less  according  as  the  land  used  offers  more  or  less  ad- 
vantages, the  cost  of  producing  equal  quantities  is  practically 
equalized.  But  we  have  also  found  that  the  rent  would  go  to 
the  community  through  taxation,  if  our  currency  laws  were 
reasonably  amended  (323-328).  The  unavoidable  addition  of 
the  item  "rent"  to  the  other  items  of  cost  determining  the 
value  of  the  final  consumption  goods  would  then  constitute  an 
indirect  tax,  relieving  the  community  of  all  other  taxes.  At 
any  rate,  the  employer  derives  no  benefit  from  the  addition  of 
the  rent  item  to  the  value  of  the  consumption  goods,  whetlier 
the  landowner  retains  the  greater  part  of  the  rent,  as  now,  or 
turns  the  entire  rent  over  to  the  community  in  compensation 
for  his  right  of  owning  the  land. 

If  the  employer  is  not  also  capitalist,  if  he  is  at  the  margin 
as  regards  the  use  of  capital  (257),  having  obtained  the 
capital  goods  employed  by  him  through  borrowed  money,  he 
cannot  escape  the  payment  of  interest  on  the  loan  (240)  which, 
as  an  item  of  the  cost  of  production,  is  added  to  the  other  items 
of  cost  which  together  make  up  the  market  value  of  the  goods 
produced.  Here  also  the  employer  cannot  be  held  responsible 
for  that  addition  to  the  market  value  of  the  goods  through 
which  the  consumers  are  made  to  provide  the  income  of  pure 
interest  to  the  money-lenders,  nor  does  he  derive  any  benefit 
therefrom. 

If  the  employer  is  owner  of  a  portion  or  all  of  the  capital 
employed,  he  gains  an  unearned  profit  through  the  fact  that 


349]  OLD  PROBLEMS  IN  A  NEW  LIGHT  477 

the  market  value  of  the  product  includes  pure  interest  as  an 
item  of  its  composition.  But  he  acquires  this  unearned  gain 
(265)  in  the  capacity  of  capitalist  and  not  as  employer  (146) ; 
nor  is  he  responsible  for  the  fact  that  this  profit  accrues  to 
him,  for  he  gets  it  without  any  deliberate  action  on  his  part. 
Again,  we  must  not  only  absolve  the  employer  from  all  blame 
for  this  unjust  distribution  of  incomes,  but  must  also  reiterate 
that  in  the  capacity  of  employer  he  does  not  receive  interest. 

While  the  employer  indeed  effects  the  distribution,  he  does 
so  under  the  dominance  of  economic  forces.  While  he  divides 
the  net  income  of  his  group  into  rent,  interest  and  wages,  he  is 
powerless  to  do  otherwise.  lie  is  a  mere  tool,  a  "cat's  paw" 
(358),  in  the  process  by  which  the  landlord,  the  capitalist, 
and  the  money-lender  are  accorded  their  unearned  shares, 

349.  The  Downw^ard  Tendency  of  Wages. — Wages  being 
what  is  left  of  the  market  value  of  the  product  of  labor  paid  by 
the  consumer,  after  rent  and  interest  have  been  taken  there- 
from in  the  process  of  distribution,  it  remains  for  us  to  learn 
to  what  extent  capital  gains  at  the  expense  of  labor. 

Under  given  conditions  the  share  acquired  by  the  land- 
lord is  definitely  determinable.  The  margin  of  the  use  of 
land  is  determined  by  the  quantity  of  land  required  for  the 
production  of  all  that  is  called  for  by  the  existing  demand; 
and  intra-marginal  land  cannot  return  to  its  owner  more  than 
the  value  of  the  advantage  which  its  use  affords  over  that  of 
marginal  land. 

Interest,  however,  is  determined  in  a  different  way.  Its 
primary  tendency  is  to  adjust  itself  to  the  final  efficiency  of 
capital,  and  this  has  a  positive  value  only  on  account  of  the 
insulificiency  of  the  medium  of  exchange.  But  as  a  result  of 
the  ever-increasing  indebtedness  the  sum-total  of  the  interest 
toll  gradually  increases  until  it  exceeds  what  the  "traffic  can 
bear,"  leading  to  the  well-known  periodic  exhaustion  of  the 
business  world  and  consequent  stagnation  of  business,  when 
industry  comes  to  a  partial  standstill,  and  all  worlnnen  cannot 
be  employed.  The  rate  of  interest  is  then  depressed  below  the 
rate  corresponding  to  the  final  efficiency  of  capital,  just  as  a 
falling  rain  drop  is  restrained  by  the  resistance  of  the  air  from 


478  CONCLUSIONS  [349 

attaining  the  speed  that  it  should  have  according  to  Newton  'a 
law  of  falling  bodies. 

So  long  as  there  are  workers  vainly  seeking  employment, 
they  naturally  offer  their  services  for  less  than  their  fellows 
are  getting,  with  the  consequent  tendency  of  wages  to  a  lower 
level.  When  the  number  of  workers  seeking  to  dispose  of  their 
services  is  at  all  considerable,  the  tendency  of  wages  is  toward 
a  minimum  of  subsistence,  and  at  times  even  to  a  point  below 
it.  This  is  what  has  been  termed  the  "Iron  Law  of  Wages." 
The  least  capable  workers  are  thus  forced  to  take  for  their 
share  scarcely  enough  to  meet  their  needs  and  the  needs  of 
their  children  who  are  later  to  take  their  places.  These  workers 
are  indeed  victims  of  a  grievous  condition  which  is  often, 
through  ignorance  of  the  true  state  of  affairs,  ascribed  to  the 
greed  of  employers  and  stigmatized  as  ''exploitation."  The 
ultimate  cause  of  the  inadequate  returns  to  the  workers,  the 
real  reason  of  low  wages,  is  not  to  be  found  in  the  struggle  of 
competition,  as  economists  of  the  socialistic  school  imagine, 
but  in  the  insufficient  demand  for  labor,  which,  in  turn,  is 
due  to  the  operation  of  our  currency  laws  (268-270).  The 
tendency  of  wages  to  go  below  the  current  cost  of  subsistence 
must  inevitably  continue  as  long  as  through  needless  restriction 
of  the  issue  of  currency  the  freedom  of  exchange  is  in  any  way 
obstructed. 

Meanwhile  the  army  of  the  unemployed  will  vary  in 
numbers  with  the  alternations  in  the  cycle  of  business  activ- 
ity, and  the  downward  tendency  of  wages  will  come  inter- 
mittently into  play.  In  many  countries  involuntary  idle- 
ness of  large  numbers  of  workers  has  become  a  chronic  dis- 
order of  the  social  organism,  but  periodically  it  is  manifest 
throughout  the  world.  Some  of  the  workers  perish  for  lack  of 
adequate  means  of  subsistence,  or  through  sickness  caused  by 
anxiety  and  want,  and  charity,  organized  or  unorganized,  can 
do  but  little  more  than  ameliorate  this  condition.  ]\Iany  of 
the  unemployed  become  beggars  and  ultimately  confirmed 
paupers.  It  is  undoubtedly  true  that  the  dearth  of  employ- 
ment is  largely  responsible  for  the  tramp  evil,  partly  because 
the  difficulty  of  finding  employment  develops  the  habit  of  idle- 
ness, and  partly  because  some  individuals  have  learned  how 


350]  OLD  PROBLEMS  IN  A  NEW  LIGHT  479 

to  live  without  work  tlirough  appeals  to  charity  on  the  plausible 
pretext  of  being-  unable  to  find  emplojTnent.  And  from  habitual 
idleness  there  is  but  a  short  step  to  crime.  Thus  the  system  that 
is  responsible  for  unemplojTuent  is  also  responsible  for  much  of 
the  criminality  of  our  time.  Criminal  traits  have  indeed 
become  so  rooted  in  some  classes  of  society  by  centuries  of 
oppression  that  criminologists  have  come  to  consider  the  pro- 
pensity to  crime  an  hereditarj^  disease. 

350.  Effect  of  Proposed  Currency  Reform  on  Wages. — 
To  the  workman  a  money  refomi  having  in  view  the  elimina- 
tion of  pure  interest  may  seem  to  benefit  only  borrowers  of 
money,  and  thus  leave  out  the  mass  of  wage-workers  from  any 
share  of  its  advantages.  It  would  appear  as  though  the  only 
ones  among  the  wage-workers  to  benefit  by  such  a  reform  are 
the  few  who  ultimately  work  their  way  into  the  class  of 
employers. 

Nevertheless,  the  wage-earners  would  be  the  chief  gainers ; 
the  gain  would  come  to  them  in  the  form  of  increased  wages. 

Our  original  inquiry  was  directed  toward  finding  the 
cause  of  business  depressions,  with  a  view  to  discover  a  remedy 
for  these  economic  disturbances.  The  relation  of  these  causes 
to  the  level  of  wages  has  coincidently  been  brought  to  view. 
When  business  is  depressed,  wages  are  low  because  the  supply 
of  labor  is  in  marked  excess  of  the  demand.  Competition  for 
emplojTneut  is  excessive,  and  with  two  workers  competing  for 
one  job,  wages  necessarily  go  down.  Conversely,  in  periods 
of  business  activity,  when  the  demand  for  workers  increases, 
wages  naturally  rise.  But  our  investigation  has  traced  the 
excess  of  the  supply  of  labor  over  the  demand  to  undue  re- 
strictions in  the  issue  of  currency  (268-270).  Through  the 
removal  of  these  restrictions,  as  here  suggested  (302-308), 
business  activity  would  be  promoted  to  such  an  extent  that 
even  that  portion  of  the  product  which  now  goes  as  pure  in- 
terest to  capital  and  to  money,  would  go  to  wages  instead. 
Hence  the  workers  would  be  getting  all  that  is  really  due  them, 
and  the  universal  dissatisfaction  over  the  present  manifestly 
unjust  distribution  of  incomes  would  no  longer  have  any 
reasonable  ground. 

The  income  of  the  employer,  as  manager  of  the  business, 


480  CONCLUSIONS  [361 

would  likewise  be  increased  with  the  general  increase  in  wages. 
In  many  cases  the  increase  of  his  wages  would  even  more  than 
balance  the  disappearance  of  capital  returns  from  his  income, 
so  that  both  workmen  and  employers  would  have  every  cause 
to  welcome  the  change.  Only  the  unearned  profits  of  capital 
would  disappear. 

351.  Protective  Tariff.— In  the  effort  to  maintain  a  high 
level  of  wages,  most  industrial  countries  have  adopted  the 
policy  of  ''protection, "  consisting  of  a  tax  on  imports  designed 
to  impede  competition  from  abroad. 

This  method  of  keeping  wages  up  is  like  an  attempt  to 
cure  a  disease  by  merely  symptomatic  treatment.  Instead  of 
freeing  commerce  from  the  shackles  imposed  upon  it  through 
the  restriction  of  the  medium  of  exchange,  whereby  a  portion 
of  labor's  wages  is  diverted  from  the  natural  channel,  a  pro- 
tective tariff  adds  but  another  restriction  to  the  freedom  of 
exchange.  The  periodic  inability  of  a  large  number  of  workers 
to  find  employment  is  looked  upon  as  an  unavoidable  con- 
comitant of  our  modern  industrial  life,  being  regarded  as  the 
result  of  "overproduction"  due  to  the  great  increase  of  labor's 
productivity  through  advances  in  the  industrial  arts.  Most 
countries,  therefore,  strive  to  hold  for  their  industries  the 
largest  possible  share  of  the  inadequate  demand  by  reducing 
the  supply  from  abroad.  To  this  end  tariffs  are  imposed  with 
the  object  of  closing  the  home  market  as  far  as  possible  to 
foreign  products,  and  all  sorts  of  expedients  are  resorted  to  in 
the  effort  to  gain  foreign  markets  for  the  home  products.  This 
has  led  to  the  system  of  paying  bounties  on  the  exportation  of 
certain  products,  and  of  subsidies  to  transportation  and  other 
agencies.  Each  nation  seeks  to  increase  its  exports  and  to 
diminish  its  imports,  and  an  excess  of  exports  over  imports 
is  regarded  as  a  favorable  "balance  of  trade." 

To  export  more  goods  than  are  imported  obviously  reduces 
the  amount  of  wealth  in  a  country.  It  is  therefore  by  no 
means  self-evident  why  such  a  policy  is  regarded  as  beneficial. 
But  the  popular  faith  in  protection  finds  explanation  in  the 
fact  that  commerce  is  carried  on  by  exchanging  goods  for 


351]  OLD  PROBLEMS  IN  A  NEW  LIGHT  481 

money.  The  policy  of  protection  is  not  to  prevent  inter- 
national trade,  but  to  permit,  or  by  bounties  even  to  promote, 
selling  abroad,  and  to  restrain  buying  abroad.  It  favors  ex- 
changes of  home  products  for  money  and  hinders  exchanges 
of  money  for  foreign  products.  It  is  therefore  clear  that  the 
real  effect  of  tariffs  and  bounties  is  to  prevent  the  exportation 
of  money  and  to  increase  the  home  stock  by  drawing  upon  the 
supply  abroad.  Tariffs  and  bounties  are,  in  fact,  formidable 
weapons  used  in  the  international  warfare  for  the  possession 
of  money. 

The  underlying  motive  for  this  contest  is  the  same  as  that 
which,  during  the  eighteenth  century,  prompted  some 
European  states  to  forbid  the  exportation  of  gold  and  silver. 
It  would  therefore  seem  natural  that  with  the  decadence  of 
the  Mercantile  school  of  economists,  who  urged  this  prohibition, 
and  with  the  rise  of  the  school  which  promulgates  the  volume 
theory  of  the  value  of  money,  the  policy  of  protection  would 
have  been  abandoned.  Yet,  such  has  not  been  the  case.  It  is 
to  be  noted  that  if  the  volume  theory  were  true,  the  exporta- 
tion of  goods  for  money  would  be  a  losing  proposition,  because 
the  amount  of  goods  possessed  by  a  nation  is  reduced  by 
exportation,  while  the  value  of  all  the  money  in  the  country 
would,  according  to  the  volume  theory,  remain  the  same  in 
spite  of  all  the  additional  money  received  through  commerce 
(119). 

But  in  the  light  of  our  investigation  and  conclusions  the 
reason  for  the  widespread  popular  approval  of  the  policy  of 
protection  is  not  far  to  seek.  Experience  has  indeed  proved 
what  we  have  found  true  in  theory,  namely  that  an  increase  of 
the  amount  of  available  money  is  coincident  with  an  increase 
of  industrial  activity.  A  reduction  of  imports  has  the  effect 
of  keeping  money  from  going  out  of  the  country,  and  in  the 
measure  in  which  tariff  brings  about  an  excess  of  exports  over 
imports,  it  has  the  effect  of  bringing  money  into  the  country 
(353).  And  even  if  the  money  due  on  exported  goods  is  not 
brought  home,  but  instead  is  invested  in  the  importing  countrj', 
an  advantage  accrues  to  the  exporting  country,  because 
through  the  obligation  to  pay  interest  or  dividends  on  the  in- 
31 


482  CONCLUSIONS  [352.  353 

vestment  the  country  that  imports  becomes  tributary  to  the 
country  that  exports.  A  so-called  favorable  balance  of  trade 
results  either  in  the  importation  of  money,  or  in  the  acquisition 
of  a  continuous  revenue  payable  in  money. 

352.  Balance  of  Trade  Co-related  to  Rate  of  Interest. — 
A  difference  in  the  current  rate  of  interest  prevailing  in  any 
two  countries  has  a  direct  bearing  on  the  balance  of  trade 
between  them.  There  is  a  natural  tendency  to  the  investment 
of  capital  where  its  returns  are  greatest.  When  in  any  country 
the  rate  of  interest  is  low,  there  is  a  tendency  of  money  to  go 
abroad,  where  interest  is  higher.  A  transfer  of  money  is 
generally  effected  by  transfer  of  bank  credit  through  bills  of 
exchange.  While  the  trade  between  two  countries  is  even,  the 
demand  in  both  for  such  bills  in  payment  of  imports  balances 
the  supply,  so  that  in  reality  no  money  need  be  sent  either 
way,  the  imports  paying  for  the  exports.  But  when  in  one 
of  the  countries  the  importers'  demand  for  exchange  is  aug- 
mented by  the  demand  of  investors,  the  exchange  rate  goes 
up.  This  adds  to  the  cost  of  importing  into  low-interest 
countries  and,  of  course,  vice  versa,  and  affords  an  impulse 
toward  exportation  of  goods  from  low-interest  countries,  while, 
on  the  other  hand,  in  high-interest  countries  the  impulse  is 
toward  importation. 

A  difference  in  the  rate  of  interest  is,  of  course,  only  one 
of  the  several  factors  which  affect  international  trade  balances. 
Where  other  factors  of  opposite  tendency  predominate,  they 
may  overbalance  the  normal  effect  of  a  difference  of  prevailing 
interest  rates. 

353.  Adveintages  of  a  Tariff. — The  primary  effect  of  a 
tariff  is  that  of  lessening  foreign  competition  in  the  home 
market,  and,  as  a  result,  the  prices  of  the  goods  affected  are 
higher  than  they  would  be  otherwise.  The  increased  price  of 
such  goods  tends  to  stimulate  their  home  production  and  cor- 
respondingly to  stimulate  the  demand  for  labor.  This  is  fol- 
lowed in  normal  sequence  by  a  rise  in  the  price  of  labor,  in 
other  words,  by  an  advance  of  wages.  But  this  stimulus  con- 
tinues only  to  a  point  where  the  rise  of  wages  corresponds  to 
the  rise  of  the  general  price  level.    In  this  respect  the  wage 


854]  OLD  PROBLEMS  IN  A  NEW  LIGHT  483 

earners,  although  getting  higher  wages,  gain  no  advantage 
thereby  (284). 

But  there  is  another  effect  of  a  tariff  which  affords  an 
actual  gain  to  the  wage  earners.  Through  impeding  the  im- 
portation of  goods  it  helps  to  that  extent  in  producing  a  so- 
called  ' '  favorable ' '  balance  of  trade,  which  simply  means  that 
the  money  resources  of  the  country,  instead  of  being  lessened 
through  remittance  abroad  to  pay  for  goods  imported,  are 
really  increased  through  receipts  of  money  in  payment  of 
goods  exported  (351).  As  a  result,  the  monetary  strain  which 
depresses  industrial  activity  is  to  that  extent  relieved  and  the 
demand  for  labor  correspondingly  augmented.  This  causes 
an  increase  of  wages  independent  of  that  due  to  the  rise  of 
prices,  and  this  item  of  the  increase  becomes  a  real  gain  to  the 
wage  earners  of  the  country. 

It  is  thus  apparent  that  the  sole  advantage  of  the  tariff  is 
but  in  the  nature  of  a  partial  offset  against  the  disadvantages 
resulting  from  the  existing  scarcity  of  the  medium  of  ex- 
change. With  the  currency  system  so  organized  as  to  permit 
the  amount  of  currency  automatically  to  adjust  itself  to  the 
actual  needs  of  industry  and  commerce,  the  demand  for  labor 
would  become  equal  to  its  supply,  tariff  or  no  tariff.  "Pro- 
tection" would  then  become  useless  as  well  as  needless,  and 
free  trade  would  be  to  the  interest  of  all. 

354.  Trade  Unions. — Quite  on  a  par  with  the  policy  of 
placing  obstructions  on  international  commerce  as  a  means  of 
promoting  domestic  prosperity  is  the  effort  of  trade  unions 
to  restrict  the  employment  of  labor  as  a  means  of  benefiting 
the  laborers.  Both  measures  are  resorted  to  as  protection 
against  what  is  supposed  to  be  the  effect  of  competition  (346). 
In  both  eases  the  object  is  to  raise  wages;  in  the  one  case  by 
increasing  the  demand  for  labor  and  in  the  other  by  keeping 
down  its  supply.  With  this  latter  object  in  view,  trade  unions 
constantly  strive  for  a  reduction  of  working  hours,  resist  in 
various  ways  the  introduction  of  labor-saving  devices,  urge 
for  the  arbitrary  restriction  of  immigration,  insist  on  the 
limitation  of  the  number  of  apprentices  and  endeavor  to  ex- 


484  CONCLUSIONS  [355 

elude  from  employment  all  who  are  opposed  to  these  measures. 

The  justification  of  this  policy  is  based  on  the  mistaken 
idea,  prevalent  among  wage  earners,  that  it  is  the  selfishness 
and  greed  of  employers  which  is  responsible  for  the  existing 
unsatisfactory  wage  rates  and  the  manifestly  unjust  distribu- 
tion of  wealth.  It  is  argued  that  employers  obtain  undue 
advantage  by  reason  of  the  competition  of  workers  for  em- 
ployment, and  that  all  measures  for  overcoming  this  advantage 
are  justifiable. 

355.  Labor  Legislation. — It  is  quite  natural  that  trade 
unions,  in  their  effort  to  obtain  for  their  members  redress  of 
those  grievances  which  they  consider  to  be  due  to  the  selfish- 
ness of  employers,  should  endeavor  to  accomplish  the  end 
through  legislation. 

Prominent  among  the  statutes  that  have  been  enacted  prin- 
cipally through  these  endeavors  are  laws  limiting  the  working 
hours,  not  only  of  minors  and  of  women,  but  also  of  men, 
laws  eliminating  or  restricting  the  competition  of  convict 
labor  with  free  labor,  laws  restricting  immigration  with  the 
view  of  protecting  workers  already  on  the  ground  from  the 
competition  of  others  from  elsewhere. 

"While  some  of  these  measures  are  humanitarian  in  their 
tendency,  the  one  common  effect  of  all  is  that  of  extending 
opportunity  of  earning  a  living  to  workers  who  otherwise 
cannot  find  emplojonent.  But  these  measures,  whether  they 
limit  the  employment  of  minors,  of  foreigners  or  of  convicts, 
or  the  hours  of  labor,  cannot  remove  the  cause  which  limits 
the  employment  of  workers  generally,  and  cannot  therefore  do 
more  than  better  the  condition  of  some  workers  at  the  expense 
of  others. 

While  a  reduction  of  the  time  of  labor  is  not  only  desir- 
able, but  should  be  the  natural  result  of  the  constantly  in- 
creasing facilities  of  production,  it  is  nevertheless  futile  to 
attempt  to  raise  the  wage  level  through  a  reduction  of  the 
hours  of  labor.  A  lasting  improvement  can  be  attained  only 
by  removing,  through  rational  currency  reform,  the  existing 
obstacle  to  the  full  employment  of  labor,  so  that  the  fear  of 


356]  OLD  PROBLEMS  IN  A  NEW  LIGHT  485 

being  left  unemployed  will  no  longer  compel  men  to  submit 
to  unfair  conditions. 

356.  Arbitration  of  Labor  Disputes. — Differences  often 
arise  between  workmen  and  employer,  as  in  questions  of 
wages  or  of  conditions  of  employment,  which  are  not  properly 
susceptible  of  adjustment  by  law,  and  in  the  effort  to  bring 
such  disputes  to  an  amicable  conclusion,  resort  is  often  had  to 
arbitration.  This  method  is  gaining  ground  to  such  an  extent 
that  the  propriety  of  making  it  compulsory  has  many  ad- 
vocates. Yet,  when  closely  examined,  arbitration  in  such  cases 
is  essentially  irrational. 

Arbitration  is  quite  in  place  in  the  case  of  international 
differences,  or  when  a  dispute  arises  over  an  existing  agree- 
ment which  admits  of  varied  interpretation,  or  when,  for  in- 
herent reasons,  the  original  agreement  cannot  be  specific  as  to 
certain  details,  as  in  the  case  of  fire  insurance  adjustments. 
In  fact,  the  mediation  of  the  courts  in  civil  suits  is  essentially 
an  act  of  compulsory  arbitration.  But  when  two  parties  are 
about  to  enter  into  an  agreement  regarding  their  future  re- 
lations, such  as  an  agreement  regarding  the  rate  of  wages,  it 
would  seem  to  be  most  unreasonable  to  give  to  a  third  party 
the  power  to  decide  the  terms  of  this  agreement. 

The  wage  worker  is  really  a  seller  of  his  services  which  the 
employer  buys.  Ilis  position  is  analogous  to  that  of  the  mer- 
chant who  offers  his  goods  for  sale,  while  the  employer  cor- 
responds to  the  merchant's  customer.  Suppose,  now,  that  a 
merchant  raises  the  price  of  his  goods,  and  an  old  customer, 
considering  the  increased  price  too  high,  takes  steps  to  transfer 
his  patronage  to  the  merchant's  competitor.  And  suppose 
further  that  the  merchant  seeks  to  coerce  the  customer  to  con- 
tinue his  patronage  and  proposes  that  a  third  party  decide 
the  price  to  be  paid.  This  would  no  doubt  be  considered  a  very 
absurd  proceeding.  Yet,  it  is  precisely  parallel  to  a  demand 
by  workmen  to  have  the  rate  of  wages  or  some  other  grievance 
adjusted  by  arbitration.  Those  who  advocate  arbitration  for 
fixing  the  terms  of  a  contract  regarding  future  relations  of 
employer  and  employed  are  evidently  at  their  wits'  end  in  an 


486  CONCLUSIONS  [357. 358 

effort  to  correct  an  evil,  the  cause  of  which  they  do  not  tmder- 
stand. 

357.  Strikes  and  Boycotts. — When  differences  arising  in 
labor  disputes  cannot  be  settled  by  conciliatory  measures,  and 
arbitration  is  not  acceptable  to  both  parties  involved,  organized 
workers  frequently  seek  to  enforce  their  demands  by  striking. 
Besides  refusing  to  continue  w^orking  on  their  employers' 
terms,  they  endeavor  in  various  ways  to  keep  others  from  doing 
so.  Failing  in  this,  they  sometimes  attempt  to  deprive  the  em- 
ployer of  a  market  for  his  products  through  concerted  meas- 
ures, known  as  *  *  boycotting. ' ' 

Such  proceedings,  even  if  successful,  cannot,  however, 
permanently  benefit  the  workers  as  a  class.  If  they  succeed 
in  raising  wages  above  the  competitive  level,  the  increase  be- 
comes an  addition  to  the  cost  of  production  and  must  therefore 
in  the  end  fall  on  the  workers  themselves  as  consumers  of  the 
products,  through  a  corresponding  rise  of  prices  (358).  The 
condition  which  is  the  ultimate  cause  of  low  wages  remains 
unchanged,  and  though  the  nominal  rate  of  wages  be  sustained 
at  a  higher  level  by  these  means,  the  actual  rate  of  wages  re- 
mains the  same,  the  rise  in  the  nominal  rate  of  wages  being 
balanced  by  a  general  rise  in  prices. 

A  permanent  cure  for  the  prevailing  industrial  discon- 
tent can  be  hoped  for  only  through  the  removal  of  its  funda- 
mental cause.  When  capital  has  no  longer  the  power  to  com- 
mand an  unearned  revenue,  it  will  become  generally  recog- 
nized that  all  measures  which  in  any  way  restrict  industrial 
freedom  are  inherently  wrong,  and  this  applies  not  only  to 
laws  restricting  the  processes  of  exchange,  but  likewise  to 
strikes  and  boycotts  which  interfere  with  the  natural  processes 
of  production  and  distribution. 

358.  What  Trade  Unions  Accomplish. — Trade  unions 
have  their  prototype  in  the  trade  guilds  of  the  Middle  Ages, 
which  were  originally  organized  to  protect  their  members 
against  the  encroachments  of  their  overlords.  But  in  course 
of  time,  after  overcoming  feudal  oppression,  they  became  op- 
pressive in  their  turn.  Having  acquired  certain  privileges, 
they  so  regulated  admission  to  their  ranks  that  the  number  of 


358]  OLD  PROBLEMS  IN  A  NEW  LIGHT  487 

"masters"  that  might  establish  themselves  in  business  was 
rigorously  limited,  and  in  this  way  they  restrained  competition 
in  their  respective  fields. 

In  the  development  of  trade  unions  we  have  a  striking 
example  of  history  repeating  itself.  In  the  early  stages  of 
modern  industrialism,  following  the  invention  of  the  steam 
engine,  wages  were  at  the  starvation  point  and  the  hours  of 
labor  so  long  as  to  leave  barely  time  for  needed  sleep.  Under 
the  stress  and  burden  of  the  abject  condition  to  which  the 
masses  of  the  working  class  were  thus  reduced,  the  workers 
strove  to  obtain  justice  by  united  action,  but  their  efforts  were 
at  first  obstructed  by  the  enactment  of  laws  forbidding  the 
formation  of  labor  unions.  Through  persistent  agitation 
against  this  despotism  the  working  classes  succeeded  in  the 
course  of  the  nineteenth  century  in  having  these  legal  obstacles 
to  their  organized  efforts  completely  removed. 

It  was  not  long,  however,  before  success  in  this  direction 
was  followed  by  a  change  in  the  attitude  of  the  trade  unions, 
from  a  striving  for  greater  freedom  for  themselves  to  a  striv- 
ing for  lessening  the  freedom  of  others.  From  a  position  of 
justifiable  defence  and  insistence  on  equal  rights,  these  unions 
have  gone  to  the  length  of  subverting  equal  rights,  not  only 
of  employers,  but  of  fellow  workers  as  well.  Having  gained 
freedom  for  themselves,  they  have  in  their  turn  become  op- 
pressors through  placing  obstructions  against  industry,  in  the 
vain  belief  that  they  can  thereby  be  permanently  advantaged. 

Trade  unions  are  considered  by  many  who  have  the  well- 
being  of  wage  earners  at  heart  as  necessary  to  conserve  their 
rights.  This  conviction,  however,  rests  on  a  misinterpretation 
of  certain  facts. 

Since  the  beginning  of  the  nineteenth  century  the  economic 
and  social  conditions  of  wage  earners  have  been  vastly  im- 
proved. Wages  have  been  increased,  the  time  of  labor  short- 
ened and  the  social  standing  of  workmen  greatly  enhanced. 
The  same  period  also  marks  the  rise  of  labor  unions.  More- 
over, wages  in  well  organized  trades  are,  as  a  general  rule, 
higher,  and  the  time  of  labor  shorter,  than  in  trades  and  occu- 
pations which  are  not  so  well  organized.    This  is  claimed  to 


488  CONCLUSIONS  [358 

prove  that  the  betterment  in  the  position  of  the  wage  earners 
has  been  due  to  the  efforts  of  trade  unions,  and  that  these 
bodies  are  necessary  to  maintain  the  economic  advantages 
which  labor  has  gained.  And  yet,  this  inference  is  not  justifi- 
able and  rests  on  a  mere  coincidence  of  facts. 

We  have  found  (347)  that  wages  equal  the  value  of  the 
product  of  labor  less  that  quotum  which  is  acquired  by 
capital.  It  follows,  then,  that  wages  can  be  permanently  in- 
creased only  in  two  ways,  namely  by  increasing  labor's  pro- 
ductivity, or  by  reducing  the  quotum  which  goes  to  capital, 
or,  of  course,  by  both  processes  combined. 

Now,  it  is  clear  that  the  increase  in  the  productivity  of 
labor  which  has  taken  place  in  the  course  of  modern  industrial 
development  has  been  due  entirely  to  inventions  and  discov- 
eries, and  the  processes  through  which  these  were  made  avail- 
able. It  is  through  progress  in  this  line  that  the  worker  is 
enabled  to  produce  far  more  goods  wth  less  labor  than  ever 
before.  But  what  have  labor  unions  done?  They  have  per- 
sistently opposed,  both  actively  and  passively,  the  introduction 
of  devices  and  methods  for  increasing  the  output  of  labor. 
Trade  unions  certainly  cannot  claim  to  have  increased  wages 
through  increasing  the  productive  capacity  of  labor. 

Nor  have  they  done  aught  to  reduce  the  quotum  which 
capital  obtains  through  its  grip  on  the  industrial  world.  In- 
stead of  aiding  the  employer  to  overcome  the  handicap  which 
makes  him  a  tool  in  the  process  through  which  capital  obtains 
an  undue  share  of  the  products  of  labor  (348),  these  unions 
have  actually  added  to  the  difficulties  of  the  employer  and 
strengthened  the  power  of  capital.  Although  it  is  not  im- 
proper for  them  to  insist  on  the  enactment  of  laws  compelling 
payment  of  wages  in  legal  money,  these  laws  act  as  a  boomerang 
in  the  absence  of  such  additional  measures  as  are  necessary  to 
make  the  volume  of  currency  adequate  for  the  purpose.  With- 
out these  additional  measures  the  domination  of  the  financier 
over  the  industrial  world  is  only  strengthened  by  laws  which, 
however  desirable  and  proper,  like  those  forbidding  payment 
of  wages  in  store  orders,  add  to  the  demand  for  currency. 
The  truth  is  that  the  increase  of  wages  and  the  betterment  of 


358]  OLD  PROBLEMS  IN  A  NEW  LIGHT  489 

the  condition  of  the  wage  earning  class  which  has  come  with 
the  progress  of  modern  invention  has  been  brought  about,  not 
through  trade  unions,  but  in  spite  of  them.  While  the  progress 
of  invention  has  tended  to  increase  the  purchasing  power  of 
wages,  the  effort  of  trade  unions  has  tended  to  increase  prices 
in  the  same  proportion  in  which  it  has  succeeded  in  raising 
money  wages. 

It  is  true,  as  above  noted,  that,  as  a  rule,  wages  in  strongly 
organized  trades  are  higher  than  in  those  of  less  complete 
organization,  assuming,  of  course,  that  the  trades  compared 
are  those  in  which  wages  would  otherwise  be  equal.  Where 
the  unionizing  of  a  trade  is  incomplete,  those  employers  upon 
whom  its  forces  are  effective  must  ultimately  throw  off  this 
burden  or  go  down  under  the  competition  of  other  employers 
who  are  not  under  trade  union  restrictions.  It  is  only  in 
trades  where  all  employers  are  affected  alike,  and  where  com- 
petition is  therefore  equalized,  that  an  artificially  raised  level 
of  wages  can  be  maintained.  But  in  this  case  the  marginal 
cost  of  production  is  correspondingly  increased,  and  the  price 
of  the  product  rises  accordingly.  It  follows  that  not  employers 
nor  capitalists,  but  only  consumers,  including  all  classes,  pay 
the  increase  in  the  end  (149,  357). 

So  long  as  the  wage  level  of  only  certain  trades,  and  with 
it  the  price  of  their  products,  is  held  up  through  the  efforts 
of  trade  unions,  the  workers  in  those  trades  will  gain  more  as 
producers  than  they  lose  as  consumers.  The  reason  is  clear. 
While  the  wages  in  their  own  trade  are  held  up  to  an  artificial 
level,  the  prices  of  only  some  of  the  products  of  which  they 
are  themselves  consumers  are  being  similarly  held  up.  On  the 
other  hand,  the  workers  in  the  ununionized  trades  are  suffer- 
ing a  disadvantage  through  having  to  pay  a  higher  price  for 
the  products  of  the  unionized  trades  out  of  the  merely  normal 
wages  of  their  own  trade. 

It  is  therefore  apparent  that  wage  earners  would  not  gain 
anything,  were  all  trades  completely  unionized  and  the  wage 
level  thus  artificially  raised  throughout.  The  natural  result 
would  be  that  all  products  of  labor  would  rise  in  price  in  full 
proportion  to  the  rise  in  wages.    And  this  is  all  that  could  be 


490  CONCLUSIONS  [S58 

accomplished  in  this  direction  by  the  complete  organization 
of  labor  for  which  labor  unions  are  striving.  The  increase  in 
money  wages  being  attended  by  a  proportional  increase  in 
prices,  the  purchasing  power  of  wages  would  in  the  end  be  the 
same  as  before.  The  efforts  of  the  trade  unions  cannot  per- 
manently bring  to  the  wage  earner  a  larger  share  of  the 
products  of  labor  than  he  would  othenvise  obtain. 

Only  for  a  short  period  following  an  increase  of  wages 
that  has  been  brought  about  through  the  concerted  efforts  of 
trade  unions  can  wage  earners  as  a  class  be  gainers.  Em- 
ployers who  before  such  raise  of  wages  could  just  make  ends 
meet  are  thereafter  forced  either  to  raise  the  price  of  their 
goods  or  quit  business.  In  the  latter  case  a  rise  of  the  price 
would  naturally  follow  by  reason  of  the  reduction  of  the 
supply.  "While  the  employer  has  to  make  good  the  excess  of 
wages  for  a  while,  the  ultimate  effect  upon  the  market  is  that 
the  consumers  pay  the  advance  in  wages,  and  capital  gets  as 
much  and  labor  as  little  as  before. 

The  restraint  of  competition  by  a  combination  of  wage 
earners  as  a  means  of  increasing  wages  appeals  to  wage  workers 
as  very  promising.  But  far  from  being  an  antidote  or  cure  for 
the  prevailing  injustice  in  the  distribution  of  wealth,  it  is 
only  a  "will  o'  the  wisp"  which  the  wage  earner  pursues  in 
the  vain  hope  that  it  will  lead  him  out  of  the  "slough  of 
despond"  in  which  he  finds  himself  bemired.  Not  until  both 
workmen  and  employers  come  to  understand  that  the  under- 
lying cause  of  the  prevailing  economic  injustice  is  the  arbitrary 
limitation  of  the  volume  of  currency  and  the  consequent 
creation  of  the  abnormal  power  of  money,  will  they  see  their 
way  to  the  proper  remedy.  As  it  is,  and  as  it  has  been  through 
generations  past,  employers  see  no  other  way  than  to  combine 
to  restrict  competition  for  their  o^vn  benefit,  and  workmen  see 
no  other  way  than  to  combine  for  the  like  end.  While  they 
waste  their  energy  in  endless  contentions,  each  side  seeking  to 
combat  force  with  force,  monopoly  with  monopoly,  they  con- 
tinue to  be  an  easy  prey  to  their  common  enemy,  the  unnatural 
power  of  money.  This  they  can  overcome  only  by  obtaining 
for  themselves  the  right  of  free  exchange,  a  right  for  which 


359]  OLD  PROBLEMS  IN  A  NEW  LIGHT  491 

they  are  now  compelled  to  pay  to  the  money  power  a  toll  which 
continually  increases  until,  through  the  exhaustion  of  exchange 
facilities  and  the  overwhelming  accumulation  of  debt,  industry 
is  brought  to  a  halt. 

359.  The  Single  Tax. — The  proposition  to  abolish  all  taxes 
save  that  on  land,  urged  by  various  thinkers  at  various  times, 
has  been  made  the  central  idea  of  the  so-called  "single  tax'" 
propaganda,  popularized  by  Henry  George  and  formulated  in 
his  noteworthy  work  "Progress  and  Poverty."  During 
George 's  lifetime  this  movement  made  rapid  strides  and  gained 
many  followers,  but  since  his  death  its  progress  has  been  slow. 
This  is  no  doubt  due  to  the  fact  that  the  reasoning  by  which 
he  seeks  to  prove  that  the  measure  which  he  proposes  as  a 
remedy  for  low  wages  is  open  to  question.  The  main  line  of 
his  thesis  is  sound  and  the  faults  of  the  present  system  of  land 
tenure  are  clearly  set  forth ;  but  at  the  same  time  the  nature 
of  both  capital  and  interest  is  wholly  misconceived.  Never- 
theless, the  work  of  Henry  George  has  borne  good  fruit.  His 
presentation  of  the  land  tax  doctrine  has  left  an  indelible  im- 
pression on  modern  economic  thought.  In  various  countries, 
as  in  Australia  and  New  Zealand,  and  in  individual  localities, 
as  in  parts  of  Germany  and  of  British  Columbia,  some  initial 
steps  have  been  taken  toward  incorporating  the  tenets  of  the 
single  tax  into  law.  The  effect  of  these  measures  on  industrial 
conditions  has,  however,  fallen  far  short  of  those  benefits  that 
must  have  accrued  if  the  single  tax  were  indeed  a  cure  for 
poverty,  as  George  and  his  followers  have  maintained. 

The  aim  of  the  single  tax  proposition,  briefly  stated,  is  the 
absorption  of  the  entire  economic  rent  by  the  state  through 
taxation,  leaving  to  the  owner  of  the  land  no  portion  of  the 
rent  as  such,  but  only  a  due  compensation  for  his  services  as 
agent  in  the  process  of  collecting  the  rent  for  the  government. 
All  other  taxes  would  then  become  superfluous  and  would  con- 
sequently be  abolished.  It  is  proposed  to  start  by  taxing  only 
the  land  and  not  the  improvements  thereon,  and  to  gradually 
increase  the  tax  until  the  value  of  the  land  disappears. 

This  measure  is  advocated  on  the  ground  that  the  value  of 


492  CONCLUSIONS  [seo 

land  is  not  due  to  any  effort  on  part  of  the  landowner,  but 
arises  from  the  growth  of  population  and  from  the  improve- 
ments made  on  the  surrounding  land.  Land  has  not  been 
produced  by  labor  and,  being  the  inheritance  of  all  alike,  it 
cannot  rightfully  become  private  property. 

Henry  George  recognized  that  his  proposed  remedy  would 
be  of  no  avail  if  the  landlord,  on  being  called  upon  to  pay  a 
tax  equal  to  the  economic  rent,  could  add  this  charge  to  the 
price  of  the  produce  of  the  land  in  case  he  cultivates  it  him- 
self, or  to  the  stipulated  rent  in  case  the  land  is  let  to  a  tenant. 
This  author  therefore  reiterated  Ricardo's  demonstration 
that  the  imposition  of  this  tax  could  not  affect  the  value  of  the 
things  produced  on  the  land,  nor  could  the  landlord  raise  the 
rent  on  the  tenant.  The  rent  depends  on  the  price  of  the 
produce  and  not  vice  versa  (172).  By  the  confiscation  of  the 
rent  no  burden  is  placed  on  the  marginal  producer,  for  he 
gains  no  rent  and  pays  no  tax,  and  the  price  of  the  product  is 
determined  by  cost  at  the  margin. 

This  proposition  can  be  illustrated  by  the  diagram  Fig.  20. 
Let  us  single  out  the  element  q',  which  is  produced  at  a  cost 
equal  to  q's'.  By  imposing  a  tax  equal  to  s'r'  on  the  production 
of  this  element,  the  gross  cost  of  its  production  rises  to  q'r'. 
Treating  every  element  in  the  same  way,  the  effect  will  be  that 
the  gross  cost  of  all  elements  is  equalized,  and  the  price  qa 
remains  unaffected. 

360.  Ethical  Status  of  Land  Ownership. — That  the 
economic  rent  of  land  should  properly  accrue  to  the  com- 
munity through  taxation  is  confirmed  by  our  investigation, 
although  we  reached  the  conclusion  by  a  distinctly  different 
line  of  reasoning.  But  the  inference  that,  as  a  result  of  such 
taxation,  the  value  of  land  would  shrink  to  the  vanishing  point 
does  not  agree  with  our  conclusion  on  the  subject  and  is  evi- 
dently derived  from  the  erroneous  assumption  that  land  can 
have  a  market  value  only  if  it  returns  a  continuous  income, 
an  assumption  which  is  on  a  par  with  the  unwarranted  sup- 
position, sometimes  set  forth,  that  money  has  a  value  only  by 
reason  of  its  power  to  command  interest  (65,  107). 

In  view  of  the  fact  that  the  author  of  "Progress  and  Pov- 


860]  OLD  PROBLEMS  IN  A  NEW  LIGHT  493 

erty"  considers  capital  interest  as  altogether  right  and  proper, 
it  Avas  but  natural  that  he  believed  the  value  of  land  would 
disappear  through  taxing  it  to  the  extent  of  the  entire  economic 
rent.  According  to  his  premises  the  proposed  reform  would 
be  not  only  a  confiscation  of  the  rent,  but  of  the  value  of  the 
land  as  well.  Recognizing  that  this  outcome  of  the  proposed 
measure  has  the  appearance  of  injustice,  especially  to  those 
landowners  who  acquired  their  title  by  purchase,  he  proceeds 
to  justify  his  proposition  as  follows : 

Beginning  with  the  premise  that  land  is  not  a  product  of 
labor,  but  a  gift  of  the  Creator  to  the  entire  community  of 
mankind,  he  argues  that  land  cannot,  in  the  nature  of  things, 
rightfully  become  private  property.  Those  who  first  obtained 
control  of  the  land  as  private  property  virtually  robbed  the 
community  of  it.  Applying  the  same  rule  as  that  which  gives 
to  the  original  owner  of  a  stolen  thing  the  right  of  recovery, 
even  from  an  innocent  purchaser,  George  concludes  that  de- 
priving land  of  its  market  value  through  the  appropriation  of 
the  economic  rent  by  the  community  is  but  a  restoration  of 
the  value  of  the  land  to  the  community  and  therefore  not  in 
conflict  with  justice. 

But  this  is  not  a  true  parallel.  The  holders  of  land  have 
not  obtained  their  possessions  by  way  of  theft  or  robbery,  but 
by  preemption  or  by  way  of  gift  from  the  controlling  power. 
In  either  case  the  ownership  of  land  must  be  viewed  as  re- 
sulting through  an  agreement  between  the  land  holder  and  the 
state,  taking  the  form  of  law.  Whether  the  state  exists  in  the 
form  of  an  autocracy,  an  aristocracy  or  a  democracy  is  here 
immaterial.  That  these  agreements  and  the  laws  which  define 
them  have  developed  inequitable  features,  unforeseen  at 
first,  is  no  reason  for  proceeding,  at  a  later  date,  to  confiscate 
whatever  value  the  land  may  have  acquired.  The  fact  remains 
that  our  ancestors,  in  their  ignorance  of  what  the  future  had 
in  store,  have  permitted  some  individuals  to  acquire  private 
ownership  of  land  without  imposing  such  conditions  as  alone 
would  make  such  ownership  equitable,  and  we  are  bound  by 
their  action,  morally  as  well  as  legally.  A  bargain  made  in 
good  faith,  however  unwise  it  may  be,  must  stand;  that  it 


494  CONCLUSIONS  [361 

subsequently  is  found  to  have  been  ill  advised  affords  no  right 
to  repudiate  it.  All  that  may  reasonably  be  done  is  to  allow 
the  landowners  to  keep  the  value  that  has  legally  become  theirs 
and  to  take  such  measures  as  will  for  the  future  deprive  land 
ownership  of  its  present  power  to  bring  unearned  incomes  to 
the  owners. 

"We  have  already  observed  that  Henry  George  considered 
the  interest-bearing  power  of  capital  as  natural  and  just.  For 
this  reason  he  did  not  realize  that  the  absorption  of  the  entire 
rent  through  taxation  can  be  brought  about  by  a  reform  of  the 
currency,  and  this  without  the  elimination  of  the  value  of  land 
(328). 

361.  Henry  George's  Theory  of  Business  Fluctuation. — 
Convinced  that  the  existing  system  of  private  land  ownership 
is  the  prime  cause  of  all  the  greater  evils  that  afflict  the  social 
organism,  it  was  but  natural  that  Henry  George  should  have 
proposed  the  single  tax  as  a  cure  for  business  depression  and 
as  a  means  for  raising  wages  to  the  highest  possible  level.  He 
therefore  felt  impelled  to  trace  business  depressions  to  the 
present  system  of  land  tenure,  and  here  follows  in  brief  what 
he  says  on  this  subject : 

As  a  rule,  the  current  value  of  land  is  in  excess  of  what  can 
be  accounted  for  by  the  present  capacity  of  the  land  for  return- 
ing rent.  This  excess  is  the  speculative  value  which  is  due  to 
the  expectation  of  a  future  increase  of  its  rent  (183) ,  an  expec- 
tation based  on  general  experience.  In  anticipation  of  this 
future  development,  land  which  is  not  yet  within  the  margin 
of  cultivation  is  appropriated  and  held  for  the  rise. 

As  population  increases,  the  man  who  sets  out  in  search  for 
the  margin  must  therefore  pass  for  long  distances  through  half- 
tilled  farms  before  he  reaches  a  point  where  land  can  be  had 
free  of  rent.  "When  he  settles,  he  will  in  turn  take  up  land, 
and  those  who  follow  are  forced  farther  on,  carrying  the  mar- 
gin of  cultivation  to  still  more  remote  points.  Through  these 
speculative  appropriations  the  margin  is  pushed  out  and  the 
rent  thus  increased,  crowding  down  wages  and  interest  to  a 
point  below  which  labor  cannot  exist  nor  capital  be  maintained. 
Production,  therefore,  begins  to  stop  and  the  paralysis  is  com- 


362]  OLD  PROBLEMS  IN  A  NEW  LIGHT  495 

municated    through    all    the    interlacings    of    industry    and 
commerce. 

The  period  of  depression  thus  ensuing  wUl  continue  until 
either  (1)  the  speculative  advance  in  rent  has  been  lost;  or  (2) 
the  increase  in  the  efficiency  of  labor,  owing  to  progress  of 
improvement,  has  enabled  the  normal  rent  line  to  overtake  the 
speculative  rent  line;  or  (3)  labor  and  capital  become  recon- 
ciled to  smaller  returns.  The  rent  wiU  begin  to  advance  again, 
a  speculative  advance  will  again  take  place,  production  will  be 
checked,  and  the  same  round  be  gone  over.^**^ 

362.  Analysis  of  This  Theory. — This  explanation  of  busi- 
ness fluctuation  is  based  upon  premises  which  cannot  be  sus- 
tained. The  assertion  that  land  is  deliberately  held  out  of  use 
by  the  landowner  while  he  is  waiting  for  a  rise  is  not  generally 
true.  The  display  of  human  nature  as  here  presented  is 
unnatural  and  unreal. 

There  can  be  no  question  but  that  it  is  the  desire  for  acquir- 
ing wealth  which  impels  the  acquisition  of  land  by  those  who 
do  not  purpose  using  it  themselves.  In  view  of  the  fact  that 
land  yields  gains  in  two  ways,  namely  through  rent  and 
through  increase  of  its  value,  it  would  obviously  be  to  the 
interest  of  landowners  to  make  both  sources  of  gain  available. 
But  in  George's  theory  it  is  assumed  that  the  average  land- 
owner will  neglect  getting  the  re7it,  while  his  heart  is  set  on 
getting  the  increment.  This  assumption  is  manifestly  not 
tenable  as  a  basis  of  economic  theory.  It  is  not  necessary  to 
hold  land  out  of  use  for  the  purpose  of  gaining  the  unearned 
increment ;  nor  will  this  increment  become  greater  by  allowing 
the  land  to  lie  idle.  The  landowner  has  in  fact  no  inducement 
to  hold  the  land  out  of  use;  on  the  contrary,  he  has  every 
reason  for  putting  it  to  the  best  possible  use  under  the  circum- 
stances, so  as  to  obtain  the  rent  in  addition  to  the  increment. 
Even  though  land  has  been  appropriated,  it  is  not  for  that 
reason  held  idle,  but  is  generally  obtainable  for  use  in  return 
for  the  economic  rent,  that  is,  in  return  for  a  rent  which  the 
highest  bidder  is  willing  to  pay.     Nor  could  these  terms  of 

""C/.  George,  pp.   184   ff. 


496  CONXLUSIONS  [362 

occupancy  be  improved  by  enacting  the  single  tax  proposition 
into  law,  for  land  could  not  be  obtained  for  use  on  more 
favorable  terms  under  that  system. 

In  all  these  considerations  we  can  deal  only  with  general 
tendencies,  to  which,  in  the  nature  of  things,  exceptions  con- 
stantly occur.  These  exceptions  afforded  Henn^  George  occa- 
sion copiously  to  illustrate  his  thesis.  But  the  comparatively 
few  instances  of  land  being  held  out  of  use  for  speculative 
reasons  are  far  outnumbered  by  the  many  in  which  the  land- 
owners strive  to  put  their  holdings  to  the  best  possible  use, 
either  through  their  o^\ti  efforts  or  through  leasing  it  to 
others.  It  is  therefore  illogical  to  conclude,  as  he  does,  that 
the  speculative  holding  of  land  has  a  tendency  to  remove  the 
margin  of  used  land  beyond  the  normal  rent  line.  That  there 
is  always  some  unused  land  within  the  margin  and  some  used 
land  beyond  is  inevitable  in  the  course  of  things.  But  the 
average  condition  is  not  affected  by  such  instances,  which  are 
comparable  to  the  crests  and  troughs  of  the  waves  in  a  storm- 
tossed  sea.  There  are  rises  and  falls  on  the  surface  of  the  water, 
but  its  average  level  is  not  affected  by  the  storm, 

"Where  large  tracts  of  land  are  used  as  private  preserves, 
the  conclusion  that  the  actual  margin  is  thereby  pushed  out 
is  undoubtedly  correct.  But  such  abstraction  of  land  from 
economic  use  is  not  due  to  speculation,  and  it  is  safe  to  say 
that  it  occurs  mainly  where  the  owner  derives  unearned  in- 
come from  other  land  rented  to  tenants,  or  from  capital  in 
some  other  form.  Such  abstraction  of  land  will  therefore 
come  to  an  end  when  capital  loses  its  power  to  command  an 
unearned  income. 

It  often  happens  that  in  the  midst  of  highly  cultivated 
surroundings  or  in  central  locations  of  cities  some  plots  of 
land  are  put  to  a  less  advantageous  use  than  the  situation 
would  warrant,  and  it  appears  that  Henry  George,  observing 
such  cases  and  thinking  that  they  confirmed  his  theory,  at- 
tributed them  to  sheer  speculation  on  the  part  of  the  owners. 
An  illustration  will  suffice  to  show  that  such  cases  are  un- 
avoidable in  the  normal  course  of  events,  especially  in  rapidly 
progressing  communities. 


363]  OLD  PROBLEMS  IN  A  NEW  LIGHT  497 

Let  us  imagine  a  block  of  buildings  near  the  centre  of  a 
growing  city,  buildings  which  were  erected  when  the  city  was 
yet  but  a  town  and  which  are  little  more  than  shanties.  The 
growth  of  population  calls  for  better  and  more  commodious 
buildings,  and  such  are  growing  up  in  the  new  sections  of  the 
city.  Many  smaller  houses  in  the  old  parts  of  the  town  are 
still  in  use,  and  for  the  time  it  pays  better  to  build  new  resi- 
dences on  the  outlying  empty  lots  than  to  demolish  the  older 
dwellings  nearer  the  centre  and  replace  them  by  more  modern 
structures.  Meantime  the  business  centre  of  the  city  expands. 
In  some  streets  stores  appear  with  attractive  show  windows. 
In  other  quarters  factories  spring  up.  Here  large  office  build- 
ings arise,  and  there  theatres  or  bank  buildings  make  their 
appearance. 

Returning  to  our  block  of  antiquated  buildings,  we  find 
their  owner  observing  the  changes  going  on  in  all  directions. 
He  also  desires  to  improve  his  lots,  but  how?  He  may  be 
ready  to  meet  any  real  demand  for  improvements,  but  who 
iiows  whether  the  location,  in  the  midst  of  progressive  changes, 
will  warrant  the  erection  of  dwellings,  or  of  stores,  or  of 
factories  ?  A  mistake  of  judgment  in  this  respect  might  entail 
a  loss  far  exceeding  the  loss  of  rent  while  waiting  for  develop- 
ment. Thus  the  old  buildings  remain  standing  in  and  about 
the  centre  section  of  the  city  for  an  indefinite  space  of  time, 
only  to  give  w^ay  finally  to  buildings  which  will  put  the  various 
sites  to  their  most  economic  use. 

There  is  every  reason  to  suppose  that  similar  conditions 
would  prevail  under  any  proposed  application  of  the  single 
tax  principle.  The  assumption  that  land  which  is  not  put  to 
its  most  economic  use  is  being  deliberately  held  down  by  the 
owner  in  calm  anticipation  of  the  unearned  increment  is 
largely  a  figment  of  the  imagination,  and  while  there  are 
indeed  here  and  there  exceptional  instances  of  such  holdings, 
these  exceptions  are  too  insignificant  to  make  the  explanation 
of  business  stagnation  offered  by  Henry  George  at  all  reason- 
able. 

363.  Discrepancy  between  that  Theory  and  Facts. — The 
inadequacy  of  the  theory  on  which  business  depressions  arc 
32 


498  CONCLUSIONS  [363 

traced  to  the  private  ownership  of  land  is  further  apparent 
from  the  discrepancy  between  the  theory  and  the  facts.  If  it 
were  true  that  it  is  the  holding  of  land  out  of  use  that  hampers 
business,  then  periods  of  depression  would  be  marked  by  the 
impossibility  of  obtaining  raw  material  in  sufficient  quantity 
to  meet  the  demand.  "We  know,  however,  that  this  is  not  the 
case. 

While  Henry  George  realizes  that — 

All  trade  is  the  exchange  of  commodities  for  commodities,  and 
hence  the  cessation  of  demand  for  some  commodities,  which  marks  the 
depression  of  trade,  is  really  a  cessation  of  the  supply  of  other  com- 
modities,^'" 

he  fails  to  point  out  any  commodity  of  which,  as  he  says,  the 
supply  has  ceased.  Surely,  there  are  no  facts  to  indicate  that 
the  supply  of  products  obtained  directly  from  land  is  insuffi- 
cient during  periods  of  industrial  depression.  On  the  con- 
trary, as  noted  above,  there  is  no  scarcity  of  raw  products  gen- 
erally during  such  periods.  If  there  were  such  scarcity,  the 
excessive  demand  would  at  once  drive  up  the  prices  of  these 
raw  products,  stimulate  the  cultivation  of  land  and  increase 
rent.  Landowners  would  eagerly  put  their  land  to  profitable 
use,  and  stagnation  could  not  drag  on  for  years,  as  it  does. 
Obviously,  the  theory  does  not  agree  with  the  facts  of  the  case. 
Suppose  the  water  supply  in  some  one  quarter  of  a  town  is 
deficient.  An  expert,  seeking  to  locate  and  correct  the  trouble, 
examines  the  pressure  of  water  at  a  number  of  accessible  points 
in  the  locality  and  finds  the  water  pressure  high  at  one  point 
and  low  at  the  next.  He  therefore  naturally  concludes  that 
the  conduit  is  choked  somewhere  between.  Let  us  apply  this 
test  to  trade  stagnation.  In  the  hands  of  the  manufacturers 
and  merchants  we  find  the  supply  of  goods  congested  to  such  a 
degree  that  the  condition  is  generally  designated  as  "over- 
production." They  all  want  to  sell.  The  obstruction  which 
we  are  to  locate  is  not  to  be  looked  for  at  an  earlier  point 
in  the  process  of  production.     It  must  be  at  a  point  beyond. 

^<«  George,   p.    193. 


3641  OLD  PROBLEMS  IN  A  NEW  LIGHT  499 

On  the  other  hand,  the  consumers,  particularly  the  work- 
men, are  in  need  because  they  cannot  buy.  There  are  too 
many  sellers  and  too  few  buyers.  On  the  one  side  of  the 
point  of  sale  we  find  congestion  or  excessive  accumulation; 
on  the  other  side  we  find  deficiency  and  want.  Evidently, 
the  obstruction  lies  somewhere  between;  the  impediment  is 
in  the  channels  of  exchange.  The  commodity,  in  the  sup- 
ply of  which  a  "cessation"  has  occurred,  is  not,  as  Henry 
George  supposed,  the  produce  of  land,  but  something  very 
different,  namely  the  medium  of  exchange.  And  so  long 
as  the  law  puts  arbitrary  limitations  on  the  use  of  assured 
credit  as  a  medium  of  exchange,  the  under-supply  cannot  be 
remedied,  and  numbers  of  workmen  must  remain  unemployed. 
364.  Single  Tax  not  a  Remedy. — While  the  fundamental 
object  of  the  single  tax,  namely  the  acquisition  of  the  economic 
rent  by  the  community  instead  of  by  the  individual  landowner, 
is  justifiable  in  every  respect,  the  measure  would  be  practically 
useless  as  a  means  of  correcting  the  most  serious  of  our  in- 
dustrial ills.  The  power  of  money  to  acquire  unearned  wealth, 
the  power  without  which  land  ownership  could  not  afford  un- 
earned acquisitions,  would  still  remain  in  force.  Experience 
shows  plainly  that  the  landowner  as  well  as  the  producer  is 
subject  to  the  dominance  of  this  power.  Business  enterprises, 
especially  those  of  large  magnitude,  fall  gradually  under  the 
control,  not  of  the  owners  of  land,  but  of  so-called  "financiers," 
manipulators  of  money  and  monetized  credit  (338).  If  the  tax 
on  land  were  to  replace  all  other  taxes,  and  the  ideal  of  the 
advocates  of  the  single  tax  were  realized,  it  would  soon  become 
apparent  that  the  economic  evils  from  which  we  are  suffering 
had  not  thereby  been  cured,  and  that  the  working  classes  had 
not  been  benefited.  Another  reform  would  still  be  needed, 
namely  that  of  doing  away  with  the  existing  obstacles  in  the 
process  of  exchange  (329).  On  the  other  hand,  were  these 
obstacles  first  overcome,  the  landowners  would  find  them- 
selves unable,  under  the  dominance  of  competition,  to  retain 
any  portion  of  the  economic  rent  (328),  and  the  aim  of  the 
single  tax  would  thus  be  incidentally  attained. 


500  CONCLUSIONS  [365. 366 

365.  Socialism. — Discussion  of  socialism  is  beset  with  pecu- 
liar difficulties,  chiefly  because  of  the  fact  that  the  leading 
authorities  on  the  subject  do  not  agree  in  their  statements  of 
its  propositions.  There  is  so  wide  a  divergence  in  the  various 
programs  advanced  in  the  name  of  socialism  that  it  would  be 
practically  impossible  to  review  them  all.  We  shall  here  con- 
fine ourselves  to  a  consideration  of  that  plan  of  social  reor- 
ganization which  is  most  generally  advocated  by  socialists  and 
through  which  equity  in  the  reward  of  labor  is  to  be  attained, 
namely  the  "common  ownership  of  all  means  of  production," 
including,  of  course,  land,  so  that  only  consumption  products 
become  subject  to  private  property.  Through  that  common 
o^WTiership  it  is  assumed  that ' '  the  modern  wage  system  will  be 
abolished ' '  and  ' '  competition  will  be  replaced  by  co-operation. ' ' 

None  of  the  schemes  of  so-called  socialism  is  even  reason- 
ably definite  as  to  the  ways  and  means  of  inaugurating  and 
maintaining  the  proposed  socialistic  state.  Its  authoritative 
exponents  insist  that  no  one  can  be  expected  to  know  the 
future,  and  that  the  details  of  the  process  will  naturally 
develop  in  practice.  They  propose,  in  efilect,  to  cross  the 
bridge  which  spans  the  chasm  between  the  present  world  and 
their  Utopia  when  they  come  to  it,  failing  to  realize,  in  their 
enthusiasm,  not  only  that  there  is  no  such  bridge,  but  also  that 
they  have  not  even  planned  out  a  way  of  building  one. 

The  advocates  of  socialism  are,  however,  to  be  credited  with 
a  realizing  sense  of  the  fact  that  the  present  social  order  is 
somehow  out  of  joint.  To  recognize  the  existence  of  a  wrong 
is  the  first  step  towards  reform. 

As  a  physician,  when  called  to  a  patient,  has  first  to  observe 
the  symptoms  before  he  can  diagnose  the  case  and  prescribe 
the  correct  treatment,  so  must  reformers  first  observe  those 
facts  which  reveal  the  morbid  condition  of  the  social  organism. 
This  first  step  the  socialists  have  correctly  taken.  But  in  the 
next  step,  in  the  diagnosis,  they  have  erred,  and  consequently 
in  their  prescription  they  have  gone  amiss. 

366.  Theory  of  Socialism. — The  theory  presented  by  Karl 
Marx  in  his  work  "Das  Kapital"  is  the  only  thoroughgoing 
attempt  to  propound  a  scientific  basis  for  the  proposition  of 


36G]  OLD  PROBLEMS  IN  A  NEW  LIGHT  501 

socialism.  His  theories  of  value,  of  wages  and  of  "surplus 
value"  or  interest,  have  been  discussed  at  some  length  in  our 
earlier  chapters  (164,  207-208)  and  have  been  found  to  be 
unsound.  It  is  therefore  not  necessary  to  repeat  these  argu- 
ments here. 

Were  the  reasoning  of  Karl  Marx  correct,  the  abolition  of 
the  private  ownership  of  capital  would  indeed  be  the  only 
effective  remedy  for  the  present  industrial  ills.  According  to 
his  thesis  nothing  short  of  collective  ownership  of  the  means 
of  production  can  prevent  the  acquisition  of  "surplus  value" 
by  the  individual  owners  of  capital  and  make  it  possible  for 
the  workers  to  get  the  full  reward  of  their  labor.  That  reward 
can  come  to  them  only  through  the  institution  of  the  "Co- 
operative Commonwealth."  Competition,  which  characterizes 
the  individualistic  system,  is  considered  to  be  the  means 
through  which  capital  is  enabled  to  acquire  the  "surplus 
value."  This  competition  is  branded  as  the  weapon  of  the 
strong  in  the  everlasting  warfare  of  commerce.  Production 
and  exchange,  it  is  maintained,  instead  of  being  carried  on  to 
provide  the  requirements  of  life,  develop  into  a  scramble  in 
the  market,  in  which  the  insatiable  hunger  of  the  possessors 
of  capital  for  "surplus  value"  is  the  sole  incentive  to  pro- 
duction. More  things  are  accordingly  produced  than  required, 
and  the  market  becomes  overstocked  with  products  for  which 
there  is  no  demand.  It  is  urged  that  the  ' '  competitive ' '  system 
must  give  way  to  a  "co-operative"  system  of  production,  which 
is  to  be  directed  and  regulated  by  competent  authority,  so  that 
production  shall  be  adapted  to  demand.  Some  socialists  go 
even  so  far  as  to  dissuade  wage  earners  from  saving,  and  rather 
to  cultivate  a  higher  standard  of  living,  so  that  the  amount  of 
labor  "socially  necessary"  for  the  maintenance  of  "labor 
power"  shall  be  increased,  and  with  it  the  wages  of  labor, 
while  the  share  going  as  "surplus  value"  to  capital  is  cor- 
respondingly reduced. 

These  and  other  similar  arguments  indicate  the  confusion 
of  ideas  upon  which  the  reasoning  of  socialism  Ls  based.  First 
and  foremost,  we  have  the  fact  that  competition  and  co-opera- 
tion are  not  antithetical,  as  socialism  assumes.     They  are  in 


502  CONCLUSIONS  [367 

reality  complementary,  inasmuch  as  freedom  of  competition 
develops  co-operation.  Competition  can  be  regarded  as  bane- 
ful only  by  those  whose  diagnosis  of  existing  conditions  fails 
to  go  below  the  surface.  The  regulation  of  production,  so  that 
supply  shall  be  properly  adapted  to  demand,  never  can  be 
effected  through  prescribed  regulation  so  well  as  through  the 
processes  of  untrammeled  competition  (148).  The  notion  that 
the  level  of  wages  can  be  raised  by  deliberately  raising  the 
standard  of  living  is  a  palpable  case  of  putting  the  cart  before 
the  horse  and,  at  the  same  time,  directly  conflicts  with  the 
socialistic  theory  that  under  the  individualistic  system  the 
wages  of  the  least  skilled  laborer  are  held  down  to  the  point  of 
bare  subsistence. 

367.  Impracticability  of  Socialism. — The  various  efforts 
to  give  a  coherent  foundation  to  the  propositions  of  socialism 
have  all  failed.  As  to  the  ways  and  means  of  carrying  the 
idea  into  practice,  no  definite  proposition  has  yet  been  gen- 
erally agreed  upon  by  its  advocates. 

The  problem  which  confronts  socialism  is  of  a  twofold 
nature.  In  the  first  place,  it  is  necessary  that  some  practicable 
plan  be  devised  for  turning  the  present  industrial  system  into 
a  socialistic  one.  And  that  once  done,  there  must  be  mapped 
out  some  way  of  maintaining  the  new  order  of  things. 

It  is  manifest  that  the  transition  can  be  effected  only  in 
two  ways,  namely,  either  by  turning  one  enterprise  after 
another  through  private  initiative  from  a  competitive  to  a 
co-operative  organization,  or  through  the  acquisition  of  all 
means  of  production  by  the  community  at  large. 

Of  these  two  methods  the  first  is  clearly  in  the  direction  of 
least  resistance  and  therefore  the  most  practicable  course. 
There  is  nothing  whatever  in  the  way  of  turning  an  existing 
industrial  enterprise  from  a  competitive  into  a  co-operative 
organization,  or  of  establishing  a  new  one  upon  this  basis. 

Suppose  that  a  number  of  workers  acquire  or  establish  and 
operate  a  manufacturing  or  distributing  business  with  capital 
of  their  own.  They  may  then  agree  that  the  entire  net  in- 
come shall  be  distributed  among  themselves  as  compensation 
for  their  services.    Whatever  ''surplus  value"  there  might  be, 


367]  OLD  PROBLEMS  IN  A  NEW  LIGHT  503 

would  thus  go  to  them  and  increase  their  wages.  It  is  plain 
that  if  the  theory  of  socialism  had  any  validity,  such  co- 
operative organization  would  easily  overcome  the  competition 
of  institutions  organized  on  the  competitive  or  so-called  cap- 
italistic plan,  and  the  socialistic  regime  would  thus  come  about 
in  a  normal  sequence  by  way  of  gradual  evolution. 

It  may  be  alleged  that  this  plan  of  socializing  industry  is 
fraught  with  difficulty,  inasmuch  as  workers  generally  are  not 
possessors  of  capital  and  therefore  cannot  successfully  carry 
out  this  plan.  But  this  objection  is  not  valid.  Workmen 
banded  in  unions  do  not  hesitate  to  enter  into  a  conflict  with 
the  competitive  system  by  striking,  thus  deliberately  sacrific- 
ing their  income  and  drawing  upon  their  capital  previously 
saved  from  their  wages.  Why  not  use  this  capital  in  the 
formation  of  co-operative  organizations  which  shall  own  the 
capital  they  use,  and  let  these  gradually  displace  the  capital- 
istic concerns  which  continue  to  compete  with  them?  This 
done,  the  establishment  of  the  socialistic  state  could  be  effected 
by  amalgamation  of  all  co-operative  organizations  into  one. 

The  fact,  however,  is  that  while  co-operative  enterprises 
have  been  actually  established  time  and  again,  and  while  some 
of  them  have  measurably  prospered  and  continue  in  existence, 
they  have  failed  to  convert  the  industrial  world  to  their 
methods. 

The  alternative  course  is  to  substitute  communal  action  for 
private  initiative  and  to  obtain  the  end  through  the  acquisition 
of  all  means  of  production  by  the  community.  It  is  often 
pointed  out  by  advocates  of  socialism  that  much  has  already 
been  done  in  this  direction.  The  postal  system,  the  highways, 
some  canals,  the  public  schools  and  numerous  waterworks  and 
gasworks  are  owned  and  operated  by  the  community.  From 
this  it  would  appear  that  the  conversion  of  our  social  system 
into  a  socialistic  state  is  actually  in  progress.  The  next  step 
would  seem  to  be  the  acquisition  and  operation  of  the  entire 
transportation,  telegraph  and  telephone  systems  by  the  govern- 
ment, and  eventually  of  all  means  of  production  used  in  in- 
dustry and  commerce. 

If  this  scheme  of  socialization  could  really  avail  to  improve 


504  CONCLUSIONS  [367 

the  condition  of  the  masses  of  the  people,  and  particularly  the 
industrial  classes,  then  the  extensive  nationalization  of  the 
means  of  transportation  and  communication  which  has  already 
taken  place  in  various  European  states  should  have  proven 
of  marked  benefit  to  the  wage  earners. 

These  expectations,  however,  have  not  been  realized;  the 
condition  of  European  workers  has  not  been  bettered  by  this 
policy  in  a  manner  or  degree  that  would  tend  to  confirm  the 
socialistic  theory.  Its  defenders  have  therefore  taken  the 
ground  that  such  governmental  ownership  of  industries  as  has 
hitherto  been  exercised  is  not  socialism,  but  merely  a  form  of 
capitalistic  or  plutocratic  monopoly.  But  in  the  absence  of 
any  explanation  of  the  difference  between  this  government 
ownership  and  ideal  socialism,  it  can  only  be  inferred  that  the 
refusal  to  recognize  the  former  as  essentially  socialistic  is 
simply  due  to  the  fact  that  the  expected  results  have  not  been 
realized. 

One  other  way  of  reaching  the  goal  of  socialism  has  been 
suggested  here  and  there  as  the  final  necessity  of  the  situation. 
It  is  the  forcible  expropriation  and  confiscation  of  all  in- 
dividually owned  capital  by  the  community.  A  serious  con- 
sideration of  this  proposition  need  not  detain  us. 

It  is  to  be  observed  at  this  point  that  while  there  is  no 
law  forbidding  the  formation  of  co-operative  enterprises  with 
the  view  of  realizing  the  dream  of  socialism,  the  free  utiliza- 
tion of  credit  as  a  medium  of  exchange,  to  which  our  investiga- 
tion points  as  the  only  way  to  attain  social  justice,  is  effectu- 
ally prevented  by  legal  obstacles.  Were  the  theory  of  socialism 
correct,  the  socialistic  state  would  naturally  evolve  under  the 
operation  of  the  law  of  the  survival  of  the  fittest.  But  the 
free  monetization  of  credit  is  made  impossible  by  the  provisions 
of  our  monetary  laws. 

The  second  problem  that  confronts  socialism  is  that  of 
maintaining  the  socialistic  order  after  it  is  inaugurated.  A 
number  of  questions  must  be  satisfactorily  dealt  with,  if  the 
socialistic  state  is  to  endure. 

It  is  of  course  assumed  that  all  men  physically  able  would 
be  engaged  in  some  work.    But  putting  aside  all  questions  as 


367]  OLD  PROBLEMS  IN  A  NEW  LIGHT  505 

to  liow  the  work  is  to  be  organized  and  the  various  tasks 
allotted,  the  manner  as  to  how,  and  in  what  quota,  the  products 
are  to  be  distributed  must  be  definitely  worked  out.  There 
are  manifestly  but  two  alternatives.  Either  the  workers  must 
be  paid  wages,  whether  in  money  or  in  orders  of  some  kind, 
with  which  to  obtain  from  the  general  store  what  they  desire, 
or  some  other  plan  of  sharing  the  products  on  the  basis  of 
communal  ownership  must  be  put  in  practice. 

If  the  distribution  is  to  be  effected  through  some  medium 
of  exchange  given  in  return  for  service,  in  other  words,  through 
pa\Taent  of  wages,  the  amount  of  the  wage  must  be  determined 
somehow.  If  that  amount  is  to  be  decided  by  official  rule,  how 
is  that  rule  to  be  applied  ?  Is  a  distinction  to  be  made  between 
the  skilled  and  the  unskilled,  the  intelligent  and  the  stupid, 
the  diligent  and  the  lazy?  If  so,  who  is  to  be  the  judge? 
Furthermore,  how  and  by  whom  are  the  prices  of  the  products 
to  be  regulated?  And  if  the  prices  are  to  be  regulated  by 
official  action,  how  is  that  action  to  be  determined  ? 

Whatever  might  be  the  details  of  the  system,  these  must 
be  in  harmony  with  the  fundamental  principle  of  socialism, 
namely  communal  ownership  of  all  means  of  production,  trans- 
portation and  communication,  which  necessarily  implies  that 
all  products  of  industry  shall  primarily  belong  to  the  com- 
munity, from  which  the  individual  is  to  obtain  what  he  wants 
in  exchange  for  his  wages,  and  that  these  wages  shall  in  some 
way  be  decreed  by  the  state.  The  state  being  the  sole  em- 
ployer, the  individual  worker  can  have  no  alternative  but  to 
be  employed  by  the  state,  and  from  the  decree  of  the  state  he 
can  have  no  appeal  but  to  the  state  itself.  The  principle  of 
individualism  that  everyone  shall  have  the  right  to  dispose  of 
the  products  of  his  own  labor  is  to  be  abolished  in  the  system 
of  socialism.  If  it  is  nevertheless  proposed  that  the  products 
shall  be  shared  out  in  proportion  to  merit ;  if  the  principle  of 
socialism  is  to  be:  "From  each  according  to  his  ability  and  to 
each  according  to  his  merit,"  the  advocates  of  socialism  have 
failed  to  point  out  a  reasonable  plan  for  gauging  individual 
merit,  especially  as  regards  efforts  which  are  essentially 
different  in  their  nature. 


506  CONCLUSIONS  [368 

368.  Communism. — The  other  alternative  in  the  distribu- 
tion of  the  products  of  labor  would  be  a  system  in  which  all 
forms  of  private  ownership  are  to  be  abolished  and  all  forms 
of  wealth  owned  in  common.  Under  this  system  every  mem- 
ber of  the  community  is  to  do  some  share  of  the  work,  and  in 
return  each  is  to  have  a  share  of  the  things  produced.  The 
general  idea  of  communism,  as  distinguished  from  socialism, 
appears  to  be  expressed  in  the  motto  usually  put  forth  by  its 
advocates : ' '  From  each  according  to  his  ability,  to  each  accord- 
ing to  his  weec?5.^' 

To  persons  of  an  emotional  nature,  whose  feelings  go 
deeper  than  their  reasoning,  this  proposition  is  so  attractive 
that  innumerable  attempts  have  been  made  to  put  it  in  prac- 
tice. But  so  far,  all  experiments  of  this  kind  have  ended  in 
failure.  The  various  enterprises  started  on  this  plan  that 
lasted  any  length  of  time  gradually  abandoned  the  principle 
of  communism  and  ultimately  developed  into  some  form  of 
joint  stock  organization. 

The  cause  of  the  failure  of  communism  is  not  far  to  seek. 
The  existing  supply  of  the  things  produced  being  open  to  all 
comers,  according  to  their  individual  needs,  the  first  question 
that  comes  up  is  as  to  who  is  to  determine  those  needs,  and 
how.  The  next  question  is,  how  is  each  member  of  the  com- 
munity to  be  brought  to  do  that  which  is  needed  to  be  done  for 
the  community  at  large,  in  other  words,  how  can  the  supply 
of  products  be  adjusted  to  meet  the  call  for  them?  For  in- 
stance, suppose  the  members  of  the  community  who  have 
chosen  to  be  shoemakers  is  only  half  enough  to  meet  the  call 
for  shoes,  are  they  to  work  double  time  to  make  up  for  the  lack 
of  their  numbers?  Under  the  individualistic  system  the  in- 
sufficient supply  of  shoes  would  cause  a  rise  in  their  price  and 
so  increase  the  recompense  of  shoemakers  above  the  average. 
This  would  attract  new  workers  to  their  ranks  and  so  bring 
down  the  price  to  the  general  level.  The  economic  force  that 
tends  to  adjust  recompense  to  effort  is  absent  in  every  plan 
of  communistic  organization.  The  communistic  system  re- 
quires of  the  individual  practically  total  self-effacement  and 
the  abandonment  of  all  expectation  of  material  reward  for 


368]  OLD  PROBLEMS  IN  A  NEW  LIGHT  507 

exceptional  services.  Experience  has  amply  proved  that  while 
men  may  consider  themselves  in  some  measure  requited  by 
honors  and  distinction  for  some  signal  service  rendered  the 
communit3%  continued  efforts  of  an  exceptional  nature  cannot 
be  looked  for  unless  there  is  present  the  further  incentive  of  a 
material  reward. 

Nevertheless,  the  idealist  finds  himself  constantly  obsessed 
bj''  the  question  as  to  why  should  a  man  whom  nature  has 
endowed  with  more  than  average  intelligence  enjoy  more  com- 
forts and  luxuries  than  his  less  talented  fellow  man?  It  is 
not  a  man's  fault  that  he  lacks  talent ;  it  is  his  misfortune.  If 
it  is  proper,  as  we  have  found  (325),  that  the  advantages 
which  nature  has  bestowed  upon  land  should  belong  to  the 
community,  why  should  not  also  the  talents  which  nature  has 
bestowed  on  individuals  belong  to  the  community? 

"When  closely  examined,  the  two  cases  are  found  to  be 
essentially  dissimilar.  Land  is  held  in  private  ownership  by 
virtue  of  a  social  compact  through  which  the  owner  acquires 
the  exclusive  right  to  the  laud  and  its  usufruct.  He  gets  the 
latter,  whether  he  himself  utilizes  the  land  or  transfers  its 
occupancy  under  lease  to  another. 

The  natural  endowments  of  an  individual,  on  the  other 
hand,  are  not  held  by  virtue  of  any  concession,  communal  or 
otherwise,  nor  can  they  be  put  to  use  by  anyone  but  the  in- 
dividual himself.  The  protection  which  the  community  affords 
him  through  the  operation  of  law  is  only  such  as  it  accords  to 
every  other  individual.  The  community  cannot  endow  a  man 
with  talent,  and  no  law  is  needed  to  protect  him  in  its  pos- 
session. Besides,  exceptional  skill  may  be  acquired  through 
patient  and  long  continued  effort,  instead  of  being  a  mani- 
festation of  natural  endowment.  Is  it  proper  that  a  man  who 
diligently  attends  to  his  work  should  be  made  to  share  with 
the  man  who  slights  it?  To  insist  on  such  sharing  would  be 
putting  a  premium  on  indolence. 

Furthermore,  the  less  gifted  always  derive  more  or  less 
benefit  from  the  achievements  of  the  more  gifted.  Every  ad- 
vance in  the  methods  of  production  benefits  in  the  end  all 
consumers  of  the  products  (149).  The  less  gifted  cannot  de- 
mand, either  as  a  matter  of  justice  or  of  expediency,  more 


508  CONCLUSIONS  [3C9 

than  what  accrues  to  them  in  the  natural  course  of  free  and 
untrammeled  competition. 

When  this  course  is  not  subject  to  interference  through 
class  privilege,  nor  through  unjustifiable  restrictions  on  in- 
dustrial and  commercial  freedom,  all  will  be  better  circum- 
stanced under  the  individualistic  system  than  under  any  pos- 
sible form  of  communism.  Under  the  one  system  progress  is 
fostered  and  production  continually  facilitated  through  the 
incentive  given  to  ambition  and  achievement  by  the  prospect 
of  substantial  reward,  while  under  any  other  system  ambition 
would  become  atrophied,  achievement  diminished  and  progress 
brought  to  a  stop. 

369.  Anarchism. — It  is  perhaps  superfluous  to  state  that 
by  "anarchism"  is  here  to  be  understood,  not  the  idea  of 
lawlessness  and  terrorism  which  it  usually  connotes  in  the  pub- 
lic mind,  but  that  propaganda,  often  called  "philosophic" 
anarchism,  which  is  based  on  the  idea  that  the  source  of  the 
disorders  of  the  social  organism  is  to  be  found  in  the  institu- 
tion of  government,  which,  it  is  asserted,  is  essentially  an  in- 
vasion of  the  natural  freedom  of  the  individual.  The  theory 
assumes  that  the  individual,  if  free  from  coercion  or  control 
by  government,  would  naturally  rule  his  conduct  through  an 
inborn  sense  of  justice  and  an  instinctive  respect  for  the 
rights  of  others. 

According  to  the  tenets  of  anarchism,  the  community  has 
no  right  to  levy  taxes,  nor  to  enforce  in  any  way  the  collection 
of  debts.  Xor  has  it  any  right  to  impose  legal  obligations 
or  restrictions  of  any  kind.  No  one  should  own  land  unless 
he  occupies  and  uses  it.  It  is  supposed  that  competition,  when 
freed  from  all  obstacles,  will  naturally  adjust  the  price  of  the 
products  of  industry  to  cost. 

Anarchism,  like  socialism,  is  proposed  as  a  means  for  cor- 
recting such  injustice  as  exists  in  the  present  social  system, 
but  it  is  diametrically  opposed  to  socialism,  both  in  its  diag- 
nosis of  the  disorder  and  in  the  remedy  prescribed.  As 
already  stated,  the  ailments  of  society  are  regarded  as  due  to 
the  invasive  interference  of  government  through  law.  But 
instead  of  distinguishing  between  laws  which  conserve  the 


369]  OLD  PROBLEMS  IN  A  NEW  LIGHT  509 

natural  rights  of  individuals  and  those  which  infringe  them, 
all  are  condemned  indiscriminately,  and  the  concepts  of  gov- 
ernment and  of  invasion  are  confused.  Under  this  delusion 
it  is  concluded  that  the  only  way  to  avoid  the  invasion  of 
natural  rights  is  to  abolish  all  government.  The  avowed  aim 
of  anarchism  is  "equal  freedom"  for  every  individual. 

But  equality  of  freedom  necessarily  imposes  a  limit  on 
freedom  by  its  very  qualification.  That  limit  is  at  the  point 
where  invasion  begins,  and  this  point  must  in  some  way  be 
determined.  Is  that  determination  to  be  made  by  each  in- 
dividual for  himself  ?  Is  each  man  to  define  what  constitutes 
invasion  and  to  decide  how  far  his  rights  go  without  intrud- 
ing on  the  equal  rights  of  another?  Even  as  between  the 
most  intelligent  and  conscientious  of  men,  differences  of 
opinion  and  conviction  continually  arise  as  to  how  far  their 
respective  natural  rights  extend.  Cases  are  bound  to  arise  in 
which  such  differences  lead  to  contentions.  Where  the  in- 
dividuals involved  fail  to  reach  a  mutual  understanding,  their 
differences  must  be  adjusted  by  some  extraneous  agency,  and 
to  be  effective,  the  decision  of  this  agency  must  be  capable  of 
enforcement.  The  process  of  the  decision  and  the  manner 
of  the  enforcement  become  naturally  a  matter  of  general 
agreement,  in  other  words,  of  a  social  compact.  Thus  we  have 
law  and  government  in  the  very  nature  of  any  conceivable 
system  of  anarchism.  Equal  freedom  can  prevail  only  by 
virtue  of  government. 

The  necessity  of  an  organized  social  body  is  yet  otherwise 
implied  in  the  very  fundamentals  of  anarchism.  A  right  of 
ownership  in  products  of  labor,  which  is  one  of  the  tenets  of 
the  anarchistic  school,  can  exist  only  by  virtue  of  a  social  com- 
pact, expressed  or  implied,  and  which  can  endure  only  where 
there  is  a  supreme  power  ready  to  protect  that  right  when 
necessary. 

Opposition  to  government  can  be  justified  only  so  far  as  it 
is  directed  against  such  enactments  of  law  as  violate  the  prin- 
ciples of  equity  and  invade  the  natural  right  of  the  individual. 
Because  some  laws  are  inequitable  and  therefore  invasive  is 
no  reason  for  overturning  all.     It  is  in  the  ignoring  of  this 


510  CONCLUSIONS  [370, 371 

truth  that   the   proposition   of   anarchism   is   fundamentally 
defective. 

370.  Land  Tenure  Under  Anarchism. — The  proposition 
of  anarchism  in  relation  to  land  is  that  occupancy  and  use 
alone  shall  confer  the  right  of  possession,  and  that  land  shall 
not  be  taxed.  This  principle,  however,  could  be  put  in  prac- 
tice only  under  conditions  which  are  tantamount,  not  to 
anarchism,  but  to  its  antithesis,  namely  communism. 

Anarchism  proposes  to  concede  the  right  of  ownership  in 
products  of  labor,  such  as  houses.  Suppose,  now,  the  owner  of 
a  house  has  cause  to  change  his  residence  and  offers  his 
vacated  house  for  rent.  The  house  would  continue  to  remain 
his  property,  and  the  rent  which  he  obtains  under  free  com- 
petition would  naturally  include,  not  only  recompense  for 
wear  and  tear,  but  also  the  rent  of  the  land  due  to  location. 
This  means  that  the  owner  of  the  house  would  remain  virtually 
the  owner  of  the  land  on  which  the  house  is  located  and  that 
he  would  continue  to  get  the  economic  rent,  even  though  he 
ceases  to  occupy  that  land. 

In  any  system  of  land  tenure  based  on  occupancy  and  use, 
as  proposed  in  the  anarchistic  system,  the  entire  rent  of  all 
land  would  accrue  to  only  a  portion  of  the  community,  as  it 
does  under  the  existing  system.  But  since  the  rent  which  land 
yields  is  really  produced  by  the  community  at  large  (180), 
the  only  just  disposition  of  the  rent  is  that  to  which  we  have 
already  pointed,  namely  its  appropriation  by  the  community 
through  taxation. 

371.  Theory  of  Anarchism  Regarding  Price. — The  sup- 
position that  under  an  anarchistic  system  the  price  of  products 
would  be  at  the  point  of  cost  could  not  be  realized  if  occupancy 
and  use  of  land  conveyed  an  otherwise  unconditional  right  of 
exclusive  possession.  It  is  a  fully  recognized  fact  that  most 
things  can  be  produced  at  a  lower  cost  in  some  places  than  in 
others,  and  it  has  already  been  shown  by  Ricardo  (172-173) 
that  the  ruling  price  equals  the  normal  cost  of  production  at 
the  margin,  that  is,  where  production  is  carried  on  under  the 
most  unfavorable  conditions  under  which  it  is  still  being  con- 
tinued. Equality  of  price  and  cost  would  therefore  obtain 
only  in  the  case  of  things  produced  at  the  margin  of  pro- 


372]  OLD  PROBLEMS  IN  A  NEW  LIGHT  511 

duction,  and  the  owners  of  intra-marginal  advantages,  who 
can  produce  at  a  less  cost,  w^ould  continue  to  reap  unearned 
profits.  Land  tenure  based  on  occupancy  and  use  would  there- 
fore effectually  defeat  the  fundamental  ahn  of  philosophic 
anarchism,  namely  the  elimination  of  unearned  gains. 

To  bring  about  that  ideal  condition  under  which  price 
will  tend  to  equal  cost,  not  only  at  the  margin  of  cultivation, 
but  under  every  degree  of  natural  advantage,  it  is  necessary 
that  the  economic  rent  become  an  item  of  the  cost  of  pro- 
duction (348)  ;  and  unless  this  item  accrues  to  the  community 
at  large,  it  must  accrue  as  an  unearned  profit  to  somebody. 
Since  our  investigation  has  made  it  clear  (327)  that  when 
money  and  capital  are  deprived  of  their  monopoly  powder  the 
owner  of  land  will  be  obliged,  under  the  working  of  purely 
economic  forces,  to  pay  this  rent  to  the  community  in  the  form 
of  tax,  it  follows  that  the  ideal  aim  of  anarchism  can  be 
realized,  not  through  the  abolition  of  government,  but  simply 
through  the  abolition  of  the  monopoly  power  of  money. 

372.  Conclusion. — We  started  out  to  learn,  if  possible, 
why  it  is  that  coincident  w'ith  the  enormous  increase  in  the 
facilities  of  production  brought  about  by  modern  advances 
in  science  and  the  arts,  there  are  frequently  recurring  in- 
tervals of  industrial  depression,  when  workers  in  many  fields 
of  industry  are  thrown  out  of  employment  and  brought  to 
suffering  for  want  of  the  very  things  of  which  the  production 
has  been  so  greatly  facilitated. 

In  the  course  of  this  investigation  we  have  been  brought 
to  the  conclusion  that  the  recurring  economic  paroxysms, 
known  as  financial  crises,  which  are  followed  by  periods  of 
industrial  depression,  are  the  inevitable  outcome  of  the 
arbitrary  limitation  of  the  volume  of  the  currency.  We  have 
found  that  every  symptom  of  the  disorder,  every  successive 
feature  of  the  industrial  disturbance,  is  clearly  and  unmistak- 
ably traceable  to  that  one  prime  cause. 

But  in  addition  to  that  we  have  also  found  that  this  same 
cause  gives  rise  to  the  most  grievous  of  the  manj^  forms  of 
social  and  economic  injustice  that  are  so  loudly  crying  for 
redress  throughout  the  modem  world.     It  is  the  extrinsic 


512  CONCLUSIONS  [372 

power  of  money,  that  power  whereby  the  owner  of  money  is 
enabled  to  "make  money"  without  doing  anything,  that  power 
whereby  the  owner  of  wealth  is  enabled  to  acquire  more 
wealth  without  producing  anything,  that  power  of  money 
which  is  due  to  its  being  the  subject  of  an  impersonal  monop- 
oly. We  have  seen  how  it  is  that  we  are  actually  fostering 
this  monopoly  without  realizing  our  error,  misled  by  academic 
misconceptions  that  have  been  handed  down  to  us  from  the 
past.  We  have  found  what  it  is  that  gives  reason  to  the  dis- 
content of  w^age  earners  throughout  the  industrial  world.  But 
we  have  also  learned  to  .understand  that,  while  it  is  true  that 
the  wage  earner  is  bereft  of  a  portion  of  his  earnings  to  the 
benefit  of  the  wealth  owner,  the  '  *  capitalist, "  it  is  not  because 
of  the  greed  or  wickedness  of  the  wealth  owner,  as  is  but  too 
often  preached  to  the  wage  earner,  but  because  this  injustice 
is  inherent  in  our  existing  economic  system,  and  more  par- 
ticularly because  of  the  constriction  of  the  facilities  of  ex- 
change. 

It  is  through  the  restriction  of  the  freedom  of  exchange  that 
money  and  capital  have  obtained  that  extraordinary  power 
through  which  industry  is  periodically  paralyzed  and  the  pro- 
ducers are  shorn  of  the  full  benefit  of  their  own  exertion.  Is 
this  process  to  go  on  unchecked  until  it  perhaps  reaches  the 
vitals  of  the  social  system?  Or  is  the  body  social  to  be  given 
over  to  be  experimented  on  with  the  crude  and  merely  tem- 
porizing remedy  of  trade  unionism,  or  with  one  or  another 
of  the  numerous  schemes  of  socialism,  all  under  a  misunder- 
standing of  the  real  cause  of  the  trouble  ?  Or  shall  it  be  that, 
with  that  cause  clearly  recognized,  we  remedy  the  trouble  by 
some  method  that  is  at  once  rational,  simple  and  safe  ? 

But  for  the  prevalence  of  groundless  economic  doctrines 
inherited  from  past  generations,  and  the  tenacity  with  which 
these  are  adhered  to  by  present-day  leaders  in  economic 
science,  this  necessary  remedy  would  before  now  have  been 
applied,  by  removing  all  arbitrary  restrictions  on  the  natural 
expansion  of  the  means  of  exchange.  Every  step  in  this 
direction  has  been  persistently  opposed  on  the  ground  that 
the  unrestricted  monetization  of  credit,  even  though  that 
credit  be  completely  assured,  is  fraught  with  danger  to  society 


372]  OLD  PROBLEMS  IN  A  NEW  LIGHT  513 

and  replete  with  wrong  to  individuals.  As  we  have  sho^vn 
in  the  foregoing  pages,  these  fears  and  anticipations  are  wholly 
imaginary.  It  is  the  existing  currency  system  that  is  fraught 
with  danger  to  society  and  injustice  to  individuals.  This 
system  must  therefore  be  reformed.  "Will  it  be  necessary  to 
have  this  reform  inaugurated  through  private  initiative,  by 
the  formation  of  local  and  federated  institutions  for  the 
clearance  of  commercial  accounts,  so  as  to  overcome  the  exist- 
ing limitation  of  the  medimn  of  exchange  by  lessening  the 
need  for  currency,  or  shall  the  facilities  of  exchange  be  in- 
creased through  reform  of  our  currency  laws  in  the  direction 
of  permitting  the  volume  of  the  currency  to  be  determined  by 
the  exigencies  of  business  instead  of  through  arbitrary  legal 
limitation  or  other  obstruction? 

As  regards  general  objections  that  can  possibly  be  raised 
against  a  reform  of  this  nature,  none  appears  to  be  really 
tenable.  There  is  scarcely  one  among  all  the  numerous  other 
remedies  proposed  for  the  existing  social  and  economic  dis- 
orders that  does  not,  or  would  not,  in  one  way  or  another 
result  injuriously  to  some  members  of  the  community,  or  to 
the  community  at  large.  The  several  measures  now  adopted  by 
governments  to  "curb  the  predatory  power  of  wealth,"  like 
graduated  taxation,  discriminate  against  the  industrious  and 
competent  members  of  the  community.  Trade  unions,  in  their 
effort  to  increase  the  recompense  of  underpaid  labor  through 
coercive  measures  directed  against  both  their  employers  and 
their  fellow  workers,  invade  the  freedom  of  all  concerned.  The 
Single-Tax  proposition,  if  enacted  into  law,  would  work  injus- 
tice to  a  large  class  of  the  community.  On  the  contrary,  the 
reform  of  the  currency  on  the  lines  proposed  in  the  preceding 
chapters  would  not  work  injustice  in  any  way  w^hatever.  No 
one  would  be  deprived  of  anything  belonging  to  him,  and  only 
the  abnormal  power  of  capital  would  come  to  an  end.  The 
effect  on  society  generally  would  be  to  free  the  workers  in  every 
field  of  industry  and  commerce,  employers  and  wage  earners 
alike,  from  the  incubus  imposed  by  the  existing  money  system 
and  to  bring  about  an  equitable  distribution  of  the  products 
of  labor,  thus  putting  an  end  to  the  discords  which  make  of  our 
modem  economic  world  a  babel  of  contention. 


APPENDIX 


COMltfENTS  ON  THE  UNITED  STATES  BANKING  AND  CURRENCY 
LAW,   APPROVED   DECEMBER   23,    1913 

While  the  present  work  was  going  through  the  press,  a  reform  of 
the  banking  and  currency  system  of  the  United  States  along  lines 
widely  discussed  for  several  years  past  was  enacted  into  law.  As 
regards  general  principles,  the  currency  to  be  issued  under  the  new 
system  does  not  differ  from  the  existing  national  bank  currency. 
The  changes  relate  only  to  certain  details. 

In  the  first  place,  the  machinery  through  which  the  currency  is 
to  be  put  into  circulation  is  more  complicated.  The  '"  Federal  Reserve 
Board  "  is  a  newly  created  organ  of  the  government  through  which 
the  issue  of  the  new  currency  is  to  be  supervised  and  regulated;  and 
a  system  of  "  Federal  reserve  banks  "  constitutes  a  new  agency  in  tiie 
process  of  issuing  currency  notes,  interposed  between  the  government 
and  the  individual  banks.  The  reserve  banks  are  to  be  organized  as 
stock  companies  of  which  the  national  banks  are  obligated,  and  under 
certain  conditions  state  banks,  trust  companies  and  even  individuals 
are  permitted,  to  become  stockholders.  With  certain  exceptions  these 
reserve  banks  can  do  business  only  with  each  other  and  with  the 
member  banks.  The  principal  exceptions  are  that  they  shall  act  as 
depositories  and  fiscal  agents  of  the  government  and  may  engage  in 
certain   foreign   banking  operations. 

In  the  second  place,  the  provisions  for  insuring  the  redeemability 
of  the  currency  notes  are  changed.  The  "  Federal  reserve  notes  "  are 
government  obligations,  redeemable  by  the  reserve  banks  in  gold  or 
lawful  money,  and  by  the  United  States  Treasury  in  gold  to  be  fur- 
nished by  the  reserve  banks.  No  specific  limit  is  placed  on  the  amount 
of  these  notes  that  may  be  issued.  This  currency  is  to  be  advanced 
by  the  Reserve  Board  to  the  reserve  banks  against  collateral  security 
in  the  form  of  commercial  paper  previously  discounted  by  the  member 
banks  and  rediscountcd  by  the  reserve  banks.  The  latter  are  to  pay 
such  rate  of  interest  on  these  advances  as  may  be  established  by  the 
Federal  Reserve  Board,  and  are  to  maintain  a  gold  reserve  of  40  per 
cent,  of  the  amount  of  the  issued  currency  remaining  in  circulation. 

The  Federal  reserve  banks  receive  deposits  from  the  member  banks 
and  also  from  the  government.  These  deposits  are  available  for  the 
rediscounting  of  the  paper  presented  by  the  member  banks,  but  a 
reserve  of  .■?.5  per  cent,  of  the  deposits,  in  gold  or  lawful  money,  must 

515 


516  APPENDIX 

be  maintained.  Each  member  bank  is  to  maintain  a  reserve  of  12,  15 
or  18  per  cent,  of  its  deposits,  according  to  location,  this  reserve  to 
consist  in  part  of  currency  and  in  part  of  deposits  in  the  Federal  reserve 
bank  of  its  district. 

The  principal  feature  of  this  system  making  for  greater  freedom 
of  exchange  is  the  provision  for  the  use  as  a  basis  for  currency  of  a  form 
of  credit  having  much  greater  compass  than  that  provided  under  the 
previous  system.  But  the  possible  benefits  of  this  provision  are  in  part, 
if  not  entirely,  neutralized  by  other  features. 

The  machinery  for  distributing  the  currency  is  unduly  complicated 
by  the  interposition  of  the  Federal  reserve  banks  between  the  govern- 
ment and  the  individual  banks.  In  the  previous  system  the  national 
banks  were  the  direct  agents  between  the  government  as  guarantor  and 
the  people  as  users  of  the  currency. 

Although  the  law  does  not  specify  a  definite  limit  to  the  amount 
of  the  reserve  notes,  there  is  nevertheless  imposed  indirectly  a  limitation 
that  tends  to  prevent  the  issue  from  becoming  adequate  to  the  real 
needs   of   commerce. 

The  provision  requiring  the  reserve  banks  to  maintain  40  per  cent, 
gold  reserve  has  this  effect.  It  is  apparent  tliat  under  this  condition 
the  amount  of  the  currency  issued  cannot  exceed  two  and  one-half  times 
the  amount  of  gold  held  as  reserve  for  the  issue.  And  inasmuch  as 
the  amount  of  gold  available  is  limited,  the  amount  of  notes  that  can 
be  issued  is  thereby  restricted. 

This  restriction  is  partially  relieved  by  the  reduction  of  the 
reserve  previously  required  of  national  banks,  this  reduction  per- 
mitting a  corresponding  expansion  of  bank  credit. 

There  is,  however,  another  obstruction  to  the  note  issue,  namely, 
the  greater  cost  of  bringing  the  notes  into  circulation,  as  compared 
with  that  under  the  old  national  bank  system.  This  cost  embraces 
several  items.  To  begin  with,  the  reserve  banks  are  to  pay  on  the 
reserve  notes  advanced  to  them  such  rate  of  interest  as  may  be 
established  by  the  Federal  Reserve  Board.  Let  us  suppose  that  the 
Board  determines  it  at  2  per  cent.  To  this  each  reserve  bank  must 
add  something  to  cover  its  expenses  and  an  amount  calculated  to 
afl'ord  dividends  on  the  40  per  cent,  gold  reserve  supplied  by  the  stock- 
holders and  lying  idle  in  the  bank.  The  stock  being  expected  to  return  a 
dividend  of  6  per  cent.,  the  discount  rate  of  the  reserve  bank  must  yield 
for  the  reserve  alone  2.4  per  cent,  of  tlie  amount  of  its  note  issue.  Should 
then  the  annual  cost  of  conducting  the  reserve  bank,  including  the  current 
assessment  for  the  requirements  of  the  Reserve  Board,  amount  to,  say,  1 
per  cent.,  the  discount  rate  of  the  reserve  bank  cannot  be  less  than  5.4  per 
cent.  And  if  the  member  banks  must  pay  this  rate  for  the  money,  they 
cannot  afford  to  lend  it  to  borrowers  at  6  per  cent.,  the  legal  limit  of 
interest  in  many  states  of  the  Union.    The  demand  for  Federal  reserve 


APPENDIX  517 

notes  by  member  banks  would  in  that  case  be  so  low  that  very  little  of 
that  currency  would  be  called  for,  unless,  indeed,  the  interest  charged 
by  the  Reserve  Board  is  kept  down  to  practically  nil,  and  the  dividends 
of  the  reserve  banks  are  made  up  in  part  from  other  sources,  such  as  the 
loaning  out  of  the  deposits  received  from  the  member  banks  and  the 
government.  Some  additional  income  is  calculated  to  accrue  from 
international  transactions,  but  this  cannot  be  accounted  as  an  important 
factor  of  the  case. 

As  regards  security,  the  national  bank  currency  is,  if  anything, 
better  safeguarded  than  the  new  currency.  The  former  is  doubly 
secured;  first,  by  the  borrowers'  pledges  held  by  the  banks  of  issue, 
and  second,  by  Federal  bonds,  the  property  of  the  banks.  Of  these  two 
securities  the  more  reliable,  consisting  of  the  bonds,  is  placed  in  custody 
of  the  government,  which,  in  turn,  guarantees  the  validity  of  the 
notes.  In  the  new  system  the  security  consists  of  the  borrowers' 
pledges  and  the  assets  of  the  reserve  banks,  including  the  required 
gold  reserve.  Of  these  the  less  reliable,  the  pledges  of  the  borrowers, 
are  placed  constructively  in  custody  of  the  government.  But  these 
securities  require  frequent  renewal  and  recurring  scrutiny,  involving  an 
added  complication  and  a  corresponding  cost. 

Should  it  happen  that  commercial  paper,  rediscounted  by  a  reserve 
bank  for  one  of  its  member  banks,  becomes  uncollectible,  and  the  bank 
that  had  it  rediscounted  is  unable  to  replace  it  by  valid  pledges,  being 
itself  bankrupt,  the  deposit  of  the  defaulting  bank  is  applied  to  cover 
the  deficit.  And  if  this  deposit  should  be  insufficient,  the  reserve  bank 
must  make  good  the  balance.  Such  loss,  accordingly,  falls  on  the 
remaining  stockholding  banks.  In  this  way  the  reserve  bank  becomes 
an  insurance  agency  through  which  any  loss  caused  to  the  reserve 
system  by  a  defaulting  bank  is  distributed  among  all  other  banks 
of  the  district.  This  is  the  only  valid  justification  for  the  creation  of 
an  agency  intervening  between  the  government  and  the  individual 
banks.  Complete  security  of  the  currency  is  thereby  assured,  but  this 
desideratum  is  attained  in  a  much  more  cumbrous  manner  than  under 
the  former  system. 

In  the  conflict  of  opposing  views  on  the  general  subject  of  banking 
and  currency  the  law,  as  finally  passed  by  Congress  and  approved  by 
tlie  President,  came  to  include  some  provisions  which,  on  close  exami- 
nation, would  appear  to  be  in  conflict  with  the  main  purpose  of  the  law. 

In  the  rediscounting  of  commercial  paper  each  Federal  reserve 
bank  is  restricted  to  dealings  with  its  member  banks.  The  profits  out 
of  which  to  pay  dividends  to  the  member  banks  as  stockholders  must 
therefore  be  made  out  of  them  as  borrowers.  If  every  stockholding 
bank  were  to  borrow  in  proportion  to  the  stock  it  holds,  it  would  be 
immaterial  whether  the  discount  rate  be  so  high  as  to  afford  normal 
dividends,  or  so  low  as  to  afford  none  at  all.     Wliat  the  member  banks 


518  APPENDIX 

would  lose  on  one  hand,  they  would  gain  on  the  other.  A  high  rate 
of  discount  charged  and  correspondingly  high  dividends  paid  by  the 
reserve  bank  would  accordingly  be  of  advantage  only  to  those  stock- 
holding banks  which  do  but  little  discounting,  while  those  that  dis- 
count more  than  a  proportionate  share  would  be  benefited  through 
a  low  rate  of  discount,  even  though  the  rate  of  dividends  would  thereby 
by  diminished.  If  the  reserve  banks  are  to  be  enabled  to  pay  divi- 
dends of  6  per  cent,  on  the  paid-in  capital,  as  indicated  in  the  law, 
their  discount  rates  must,  as  observed  above,  be  so  high  as  to  deter  the 
member  banks  from  having  their  commercial  papers  discounted,  a  con- 
dition which  obviously  militates  against  the  volume  of  currency  respond- 
ing to  the  needs  of  commerce. 

With  the  view  of  creating  an  elastic  currency,  commerciai  paper, 
of  which  there  is  an  abundance,  is  to  be  utilized  instead  of  Federal 
bonds  as  that  security  for  the  currency  which  is  to  be  held  by  the 
government.  But  it  is  the  use  of  this  very  kind  of  security  which 
introduces  an  element  of  incongruity.  Currency  is  an  instrument 
with  which  to  make  payment  for  goods  delivered  or  services  rendered 
by  one  to  another,  while  commercial  paper  is  an  instrument  through 
which  such  payment  is  postponed.  It  follows  that  under  this  plan 
the  means  for  making  payment  are  obtainable  only  through  a  system 
of  postponing  payment.  A  currency  system  requiring  as  an  essential 
of  its  existence  an  indefinite  perpetuation  of  the  practice  of  deferring 
the  payment  of  debts  through  promises  to  pay  them  in  the  future 
cannot  be  regarded  as  a  rational  solution  of  the  currency  problem. 

While  the  Federal  reserve  currency  system  is  a  step  in  the  right 
direction,  inasmuch  as  it  affords  the  possibility  of  a  much  needed 
expansion  of  the  currency  without  jeopardizing  its  soundness,  the  short- 
comings of  the  system  are  such  as  to  make  the  process  of  issuing  the 
currency  so  costly  that  the  intention  of  the  law,  that  of  rendering 
the  business  world  independent  of  financial  disturbances,  can  at  best 
be  but  partially  realized.  Commerce  and  industry  can  be  benefited 
by  the  Federal  reserve  system  only  in  the  measure  in  which  it  will 
afford  the  business  world  a  lower  rate  of  interest  and  discount  than 
ruled  before. 


LIST  OF  AUTHORS  QUOTED 

Bentham:    "Defense  of  Usury,"  by  Jeremy  Bentham,  London,  1790. 

BiLGKAM:  "  Involuntarj-  Idleness,"  by  Hugo  Biigram,  Philadelphia,  J.  B. 
Lippincott   Company,   1889, 

Bohm-Bawebk:  "Capital  and  Interest."  (Kapital  und  Kapitalzins,  von 
Eugen  V.  Bolun-Bawerk.  I  Abteilung:  Geschichte  und  Kiitik  der 
Kapitalzins  Theorien.  Innsbruck,  1884.)  Translated  by  William 
Smart,  London  and  New  York,  1890. 

"Positive  Theory  of  Capital."  (Kapital  und  Kapitalzins,  von 
Eugen  V.  Bohm-Bawerk.  II  Abteilung:  Positive  Theorie  des 
Kapitales.  Innsbruck,  1889.)  Translated  by  William  Smart, 
London  and  New  York,  1891. 

"  The  Positive  Theory  of  Capital  and  its  Critics,"  by  E.  v.  Bohm- 
Bawerk,  Quarterly  Journal  of  Economics,  January,  1896. 

Con  ANT:  "The  Principles  of  Money  and  Banking,"  by  Charles  A. 
Conant.  In  two  volumes.  New  Y'ork  and  London,  Harper  Brothers, 
1905. 

George  :  "  Progress  and  Poverty,"  by  Henry  George,  New  Y'ork,  John 
W.  Lovell  &  Co.,  1883. 

!Ma.cLeod:  "Elements  of  Economics,"  by  Henry  Dunning  Macl^od.  In 
two  volumes.    New  York,  D.  Appleton  &  Co.,  1881. 

AIabx:  "Capital."  (Das  Kapital,  von  Karl  Marx,  Hamburg,  Otto 
Meissner,  1872.)  Translated  by  Samuel  Moore  and  Edward  Aveling, 
Chicago,  Charles  H.  Kerr  &  Co.,  1906. 

Mill:  "  Principles  of  Political  Economy,"  by  John  Stuart  Mill.  In  two 
volumes.    New  York,  D.  Appleton  &  Co.,  1884. 

Newcomb:  "  Principles  of  Political  Economy,"  by  Simon  Newcomb,  New 
York,  Harper  Brothers,  1886. 

Perry:  "Elements  of  Political  Economy,"  by  Arthur  Latham  Perry, 
New  York,  Charles  Scribner  &  Co.,  1866. 

RiCARDO:  "  The  Works  of  David  Ricardo,"  by  J.  R.  McCulloch,  London, 
John  Murray,  1886. 

Seager:  "Principles  of  Economics,"  by  Henry  Rogers  Seager,  New 
Y'ork,  Henry  Holt  &  Co.,  1913. 

Smith  :  "  Wealth  of  Nations,"  by  Adam  Smith,  London,  George  Rout- 
ledge  &  Sons. 

Spencer  :  "  Social  Statics,"  by  Herbert  Spencer,  New  Y'ork,  D.  Appleton 
&  Co.,  1888. 

Walker:  "  Aloney,"  by  Francis  A.  Walker,  New  York,  Henry  Holt  &  Co., 
1883. 

519 


OUTLINE  OF  INDEX 


14. 
15. 
16. 
17. 

18. 

19. 


Abstinence.     See  Theories. 

Anarchism.     See  Theories. 

Arbitration.   See  Trade  Unions. 

Bank  Credit. 

Bank  Notes.     See  Currency. 

Banks  of  Issue. 

Barter.  See  Distribution  of 
Products. 

Business  Stagnation. 

Capital. 

Capital  Goods. 

Chance. 

Checks.     See  Bank  Credit. 

Commerce.  See  Distribution 
of  Products. 

Commercial  Clearance.  See 
Currency  Reform. 

Communism.     See  Theories. 

Competition. 

Cost  of  Production. 

Credit. 

Currency. 

Currency  Reform. 

Debts  and  Debtors. 

Definitions. 

Demand.  See  Supply  and  De- 
mand. 

Diagrams. 

Diminisliing  Returns. 

Distribution  of  Products. 

Distribution  of  Wealth. 

Dollar.    See  Unit  of  Value. 

Economic   Forces. 

EfTort.     See  Labor. 

Employment. 


20. 


21. 


22. 
23. 
24. 


25. 
26. 
27. 


28. 
29. 
30. 

31. 

32. 
33. 
34. 

35. 


Equity. 

Exchange.    See  Distribution  of 
Products. 

Gold. 

Groups.      See    Productive 
Groups. 

Income.      See    Distribution    of 
Wealth. 

Industrial    Flow.      See    Mone- 
tary Flow. 

Inertia.    See  Economic  Forces. 

Inflation.      See    Currency    Re- 
form. 

Insurance. 

Interest. 

Labor  and  Industry. 

Labor  Legislation.     See  Trade 
Unions. 

Land. 

Land  Values. 

Laws. 

Market.     See    Distribution    of 
Products. 

Means     of     Production.       See 
Production. 

Monetary  Flow. 

Money. 

Monopoly. 

Ownership.     See  Rights. 

Price  and  Price  Limits. 

Production   and   Consumption. 

Productive  Groups. 

Profits. 

Redemption.     See  Currency. 

Rent. 

521 


5^2 


OUTLINE  OF  INDEX 


36.  Rights. 

Risk.     See  Chance. 

Saving.     See  Economic  Forces. 

Seignorage.       See     Value     of 

Money. 
Single  Tax,     See  Theories. 
Socialism.     See  Theories. 
Speculation.     See  Chance. 

37.  Supply  and  Demand. 

38.  Tariff. 

39.  Taxes. 

40.  Theories. 


41.  Theory. 

42.  Trade  Unions, 
Unemployment.     See   Employ- 
ment. 

43.  Unit  of  Value. 

44.  Utility. 
4o.  Value. 

40.  Value  of  Money. 
47.  Wages. 

Waste.     See  Chance. 

Wealth.     See    Distribution   of 
Wealth. 


INDEX 


[numbers  refer  to  paragraphs,  not  to  pages.] 


1.  Bank  Credit,  104,  105 
Bank  Checks,   104 
Limitation     of     Bank     Credit, 

104,  238 
Bank   Reserves,    104,   292-294, 

303 
Margin    of    Security    of    Bank 

Credit.  104,  304 
The     Real     Issuers     of     Bank 

Credit,  105 
Deposit    Insurance,    220,    263, 

289,  290,  304 

2.  Banks    of    Issue,    101,    302- 

304,  307 
Evolution  of  Modern  Banking, 

103 
"  Wild-cat  "  Banking,  103,  322 

3.  Business  Stagnation,  1,  121, 

208-284 
Cycle    of    Industrial    Activity, 

271-276 
Current   Attempts   to   Account 

for     Stagnation,     277  -  284, 

361-363 

4.  Capital,    129-135,    197.      See 

also   (5)   Capital  Goods. 
Distinction     Between     Capital 

and  Wealth,  129,  319 
All     Forms    of    Capital     Have 

P^qual      Rates     of      Income. 

131,   185,  2.58.  267 
"  Fixed  "       and       "  Floating  " 

Capital,    132r 
Active   and   Idle   Capital,   133, 

203,  211.  241,  242 
Capital  Viewed  as  a  Fund,  135 


4.  Capital — Continued. 
Efficiency  of  Capital,  155-162 
Relation  of  Capital  to  Labor, 

155-162,  191,  243 
Final     Efficiency     of     Capital, 

162,   195,   196,  205,  241,  242 
The    Aggregation    of    Capital, 

211 
Abundance  of  Real  Capital,  266 
Capital  Not  Productive,  336 

5.  Capital  Goods,  129-134,  186- 

208,  210,  211 
Classification  of  Capital  Goods, 

132 
Value   of   Capital    Goods,    132, 

133,   152,  153,  197,  198 

6.  Chance,  1,  13,  14,  215-224 
Risk,   13,   14,  72,  76,  96,  112, 

139,  219,  263 
Waste    Attending    Production, 

13,  58,  219 
Gambling      and      Speculation, 

218,  277-280 
The  Law  of  Chance  Profits,  224 

7.  Competition,    147-150 
Competition     Equalizes     Mar- 
ginal Cost  and  F'inal  Utility, 
148,  150,  221 

The  Law  of  Value  Contingent 
on  Free  Competition,  150, 
243 

Relation  of  Wages  to  Profits 
Not  Governed  by  Competi- 
tion, 1.54 

The  Strife  of  Competition,  342- 
346 

523 


524 


INDEX 


8.  Cost  of  Production,  61 

Cost  Determines  Sellers'  Price 

Limit,  61 
Cost  Theory  of  Value,  62,  63 
Marginal  Cost,  62 
Marginal     Cost    Normally 

Equals     Final     Utility,     63, 

148,    150,   221 

9.  Credit,  66-76 

Three  Forms  of  Credit,  69 
Divergent    Conceptions    of 

Credit,  70 
The  Substance  of  Credit,  72 
Superposed  Credits,   73,   100 
Public  Credit,  74,  341 
The  Value  of  Credit,  75,  76 
Depreciated   Credit,   76,   96 

10.  Currency,  77-125,  285-314. 
See  also  (11)  Currency  Re- 
form;   (29)   Money 

Currency  Laws,  85-87,  95,  98, 
99,  256,  260,  302-308 

Issuer  of  Currency  is  Debtor, 
92,  210,  259,  260,  263 

The  Substance  of  Currency, 
92,  102,  115,  286-289 

Redemption  of  Currency,  95, 
101,  292,   295-297,  302,   303 

Depreciated  Currency,  96,  112, 
114,    123,    124,   322 

"  Inconvertible  "   Currency,   96 

Subsidiary  Coin,  100 

Bank  Note  Currency,  101,  102 

The  Real  Issuers  of  Bank  Cur- 
rency, 102 

Restraints  on  the  Issue  of 
Currency,  103,  238,  260,  261, 
264 

Currency  Laws  Examined,  259, 
260 

Natural  Limits  to  the  Issue 
of  Currency,  291,  292 

The  Process  of  Issuing  Cur- 
rency, 299 


10.  Currency — Continued 
Money  Tokens,  300,  301 

Cost  of  Issuing  Currency,  301 
Missing  or  Lost  Notes,  305 

11.  Currency  Reform,  285-314 
Volume  Theory  a  Bar  to  Cur- 
rency Reform,  239,  308,  322 

"  Inflation,"  239,  320 

Commercial  Clearing  Institu- 
tions,  309-314 

Results  of  Currency  Reform, 
315,  316 

Unfounded  Apprehensions  and 
Objections,  317-320 

Effect  of  Proposed  Currency 
Reform  on  Wages,  350 

12.  Debts  and  Debtors,  66,  68 
Debt  the  Correlative  of  Credit, 

66,  68 
Public  Debt,  74,  341 
Economic    vs.    Legal    Payment 

of  Debt,  75,  95,  341 
Loan  Debts  Distinguished  from 

Business  Debts,  245 
Growth  of  Debts,  246,  255,  270, 

272,  344,  346 
The    Volume    of    Loan    Debts. 

251,  271-276,  344-346 

13.  Definitions     and     Explana- 

tions: 
Economics,  4 
Utility,  6,  24 

Immature  Products,  6,  132 
Production,  7 
Labor,   8 

Means  of  Production,  10,  132 
Consumption,  14 
Economic  Groups,  15,  16 
Rights,  17,  18 
Laws,  17,  22 

Right  of  Ownership,  18,  20,  21 
Right  and  Duty,  19 
Equity,  20 


INDEX 


5^5 


13.  Definitiois'S,  etc. — Continued. 

Value  and  Price,  23-25,  29 

Unit  of  Value,  28 

Dollar,  28 

Standard  Commodity,  29 

Supply  and  Demand,  34 

Trice  Limits,  48,  49,  56,  61 

Current  Price,  59 

Xormal  Price,  GO 

Cost  of  Production,  61 

Marginal  Effort  or  Cost,  62 

Final  Utility,  62 

Margin  of  Production,  62 

Capitalized  Values,  65 

Credit  and  Debt,  66,  68 

Money,  83,  88,  89 

Currency,  88 

"  Inconvertible  "   Currency,   96 

"  Fiat  "  Money,  97 

Seignorage,  97,  113 

Subsidiary  Coin,  100 

Issuers'  and  Agents'  Pledges, 
102 

Bank  Credit,  104 

Bimetallism,    110 

Monetary  and  Industrial  Flow, 
119 

Capital,   129-132,    135,   197 

Active  and  Idle  Capital,  133 

Wages,  137 

Profits,  137 

Personal  and  Impersonal  Ser- 
vices, 137 

Rent,    138,    139,   186 

Chance  Profits,  138,  215 

Amortization,  139 

Capitalist,  143 

Venturer,   144 

Emploj'er,   146 

Competition,   147 

Final  Emciency  of  Capital,  162 

Land,   170 

Margin  of  Cultivation,  175 

Cumulative  Rent,  176 

Unearned  Increment,  181 


13.  Deu^initions,  etc. — Continued. 

Actual  Rate  of  Land  Tax,  182 

Speculative  Land  Values,  183 

Present  and  Future  Goods,  197 

Waiting,  200 

Surplus  Value,  207 

Insurance,  220 

Economic  Inertia  and  Momen- 
tum, 221-223 

Monopoly,  225,  226 

Impersonal  Monopoly,  226,  232 

The  Barren  Circulation  of 
Money,  245,  248,  249 

Loan  and  Business  Debts,  245 

Money  in  Active  and  Passive 
State,  247 

Socialism,  Communism,  Anar- 
chism, 365,  368,  369 


14.  Diagrams: 

Fig. 

1—39,  40 

Fig. 

2—42,  43,  46,  148 

Fig. 

3—45 

Fig. 

4     46 

Fig. 

5—48-50,  56 

Fig. 

6—56-64,  115,  200 

Fig. 

7—59 

Fig. 

8—64 

Fig. 

9—64,  153 

Fig. 

10—64 

Fig. 

11—108,     121,    320, 
346 

321, 

Fig. 

12—149 

Fig. 

13—154.     155,     159, 

160, 

166-168,    181, 

185, 

257,   348 

Fig. 

14—157-159,  161,  162 

,  177 

Fig. 

15—160,  161 

Fig. 

16—161,  162,  177 

Fig. 

17—161 

Fig. 

18—161,     195.    243, 
316,  347 

244, 

Fig. 

19—161 

Fig. 

20—173,    180,     185, 
323,  325,  359 

267, 

526 


INDEX 


14.  Diagrams — Continued. 
Fig.  21—177,  178 
Fig.  22—213,  214,  260 
Fig.  23—221,  232 
Fig.  24—234,  235 

Fig.  25—247-256,267,270-275 
Fig.  26—271-276 

15.  Diminishing  Returns: 

In  the  Use  of  Capital,  10,  156 
In  the  Use  of  Land,  175 
In    the    Intensity    of    Cultiva- 
tion, 178 
In  Discounting  the  Future,  197 

16.  Distribution  of  Products,  12, 

83,  127,  217 

Advertising,  12 

Work  of  Distribution  Indis- 
pensable, 12,  217 

Buying  and  Selling  are  Recip- 
rocal, 34,  51,  52 

Barter,  47-50 

Complex  Barter,  52,  83,  295 

17.  Distribution  of  Wealth,  126- 

162,  267.     See  also   (23)   In- 
terest;    (34)    Profits;     (35) 

Rent;    (47)   Wages. 
Classification  of  Incomes,  136- 

140 
Wages,     the     Recompense    for 

Personal   Services,   137 
Profits,     the     Recompense    for 

Impersonal  Services,   137 
Apportionment  between  Labor 

and  Capital,   137,   151,   154- 

162,  267,  347,  348 
Classification  of  Profits,    138- 

140 
Composite     Nature     of     Gross 

Incomes,   139,  140,  154,  248, 

263,  264 
Amortization   is   Part  of  Cost 

of    Supplies,    139,    143,    157, 

265 


17.  Distribution    of    Wealth — 

Continued. 

The  Capitalist's  Recompense, 
139,  143,  157,  265 

The  Venturer's  Income,  144, 
219,  224 

Wages  Vary  Inversely  as  In- 
terest, 159 

Gross  and  Net  Proceeds  from 
Land,  181,  182 

Division  of  Gross  Proceeds 
from  Land,  184 

Monopoly  Incomes,  234 

Concentration  of  Wealth,  338 

Eflforts  to  Curb  the  Concentra- 
tion of  Wealtli,  339 

18.  Economic  Forces: 

Desire,  the  Impelling  Force,  5. 
35-41,  43 

Aversion  or  Reluctance,  the  Re- 
straining Force,  35,  41-43 

Evaluation,  48-50,  54 

Competition,  147-150 

Abstinence  or  Waiting,  195, 
196,  200 

Inducements  to  Save,  196,  200, 
205,  254,  318 

Inertia  and  Momentum,  221- 
223 

Economic  and  Legal  Impedi- 
ments, 225 

Monopoly,  225-235 

19.  Employment: 

Choice   of   Occupation,   44,   61, 

149 
The  Problem  of  Unemployment, 

268-270 
Remedy     for     Unemployment, 

316 

20.  Equttt,  20 

Equity  a  Test  of  Just  Laws, 

22,  259,  260,  325 
Ethics  of  Monopolies,  227 


INDEX 


527 


21.  Gold: 

Gold  the  Adopted  Standard  of 
Value,   28 

Gold  Coin  a  Credit  Instru- 
ment, 93,  94 

Gold  Reserve,   103,  292-297 

The  Value  of  Gold,  108,  109, 
320 

The  Standard  Commodity  has 
an  Assured  Market,  259 

The  Demand  for  Gold,  293,  294 

Reducing  the  Monetary  De- 
mand for  Gold,  294 

Exportation  of  Gold,  320,  351 

22.  Insurance,   139,  220 
Insurance    Item    of   Gross    In- 
terest, 139,  220,  248,  263 

Deposit  Insurance,  220,  263, 
289,  290,  304 

23.  Interest,  133,   138,  139,  186- 

214,236-267.  See  also  (17) 
Distribution    of    Wealth. 

Interest  Cannot  Accrue  to  Idle 
Capital,  133,   197 

Capital  Interest,  138,  139,  186- 
208,  242,  257,  258,  265 

Money  Interest,  138,  139,  188, 
200-204,  209-214,  240 

Composite  Nature  of  Gross  In- 
terest, 139,  248,  263,  264 

Capital  Interest  Compared 
with  Rent,  187,  258 

Capital  Interest  Compared 
with  Money  Interest,  188 

Calvin's  Explanation  of  In- 
terest, 190,  204,  237 

Interest  Theories,  190  -  208, 
236-267 

Interest  as  an  Inducement  to 
Save,  196,  205,  254 

Final  Utility  of  Waiting?,  200 

Money  Interest  is  Paid  for  the 
Use  of  Money,  210,  211,  240, 
242 


23.  Interest — Continued. 
Ineliicacy  of  Usury  Laws,  236 
Capital  Returns  Accrue  in  the 

Form  of  Idle  Capital,  244 
The  Rate  of  Interest,  252-256 
Interest    is    a    Monopoly    Tax, 

261 
Interest  a  Toll  on  the  Right  to 

Work,  261,  291,  347 

24.  Labor  and  Industry,  8,  9 
Efficiency    of    Labor,     10,     11, 

155-161 
Specialization  of  Labor,  11 
Co-operation,  11 

25.  Land,  130,  170-185 

Land  Distinguished  from  Im- 
provements Thereon,   171 

Net  Proceeds  from  Land,  181, 
184 

The  Land  Question,  323-334 

26.  Land  Values,  181-185 

The  Unearned  Increment,  181- 

184 
The  Law  of  Land  Values,  182, 

183 
Speculative  Land  Values,  183 
Land  V^alues,  Tantamount  to  a 

Public  Debt,  326,  329 
Assessment    of    Land    Values, 

330,  331 

27.  Laws: 

(A)    Economic    Laws,    17 

The  Law  of  Equal  Freedom,  22 

The  Law  of  Value,  30,  55,  58, 
64,  150 

The  Law  of  Supply  and  De- 
mand, 58,  150 

The  Law  of  Competition,  147- 
150 

The  Law  of  Wages,  166,  347- 
350 

Ricardo's   Law   of    Rent,    172 
174 


528 


INDEX 


27.  Laws — Continued. 

The  Law  of  Land  Values,  182, 

183 
The  Law  of  Chance  Profits,  224 
The  Law  of  Interest,   244-256 

(B)  Statutory  Laws,  17,  22 
Exclusive  Rights  Due  to  Law, 

18 
Currency  Laws,  85-87,  95,  98, 

99,  259,  260,  302-308 
Legal-tender  Laws,  86,  95,  96, 

98,   99,  306 
Inefficacy  of  Usury  Laws,  236 
Corporation    and    Bankruptcy 

Laws,  340 
Protective  Tariff,  351-353 
Labor  Legislation,  355 

28.  Monetary     and     Industrial, 

Flow,  119-121,  270 
Rapidity    of    Circulation,    119, 

120,   291 
Impediments      to      Industrial 

Flow,  121,  241,  270 
Flow  of  Products  in  Course  of 

Production,  153,  241 
The    Barren    Flow   of    Money, 

245-249 

29.  Money,  77-125,  285-314.     See 

also    (10)    Currency;     (46) 

Value  of  Money 
Complex    or    Indirect    Barter, 

52,  83,  259 
Money    not   a   Value   Denomi- 
nator, 78,  79,  115,  122,  123 
"  Money,"       "  Dollar,"       and 

"Gold"  often  Confused,  78, 

79,  88,  95,  115 
Gold  the  International  Money, 

79 
The  Function  of  Money,  83,  88, 

211,  241 


29.  iSIoNEY — Continued. 

The  Essence  of  Money,  84,  85, 
298 

The  Right  Conveyed  by  Money, 
87 

Theory  of  Money,  89-92 

Money  Tokens  are  Credit  In- 
struments, 89,  93,  202,  210, 
300 

Owner  of  Money  is  Lender  of 
Goods,  89-92,  209-211,  259 

Credits  and  Debits  of  the 
Money  System,  91,  92 

The  Issuer  of  Money  is  Debtor, 

92,  210,  259,  260,  263 

The   Substance    of   Money,   92, 

102,  115,  286-289 
Standard  or   "  Basic  "   Money, 

93,  94,  293 

Acceptance  of  Coin  is  not  a 
Purchase  of  Gold,  93,  259 

"  Fiat "  Money,  97,  322 

Subordinate  Money  Systems, 
106 

Money  not  a  Specific  Com- 
modity, 115,  123,  240 

Money  vs.  Capital  Goods,  131, 
132,  134,  138,  188,  202,  203, 
210,  211 

Money  Never  "Present" 
Goods,  202 

Money  Never  a  Means  of  Pro- 
duction, 203,  209 

Efficiency  of  Money,  212-214, 
238,  242 

Money  in  Active  and  Passive 
State,  247 

Tlie  Twofold  Capacity  of 
Money,  267 

Over-supply  of  Goods  Due  to 
Under-supply  of  Money,  209, 
270 

Apparent  Plethora  of  Money, 
274 


INDEX 


529 


30.  Monopoly,  18,  225-235 
Monopoly    Implies    Restraint, 

18,  226 
Franchises,  G5,  231,  334 
Impersonal  Monopoly,  226,  232 
Ethics  of  ^Monopolies,  227 
Monopoly  Incomes,  234,  235 
The  Power  of  Monopoly,  235 
Power  of  the  Money  Monopoly, 

262,  345 

31.  Price  and  Price  Limits,  2S). 

48,  49,  56 

Price  Determination,  55-61 

Buyers'  Price  Limit  is  Measure 
of  Utility,  56 

Sellers'  Price  Limit  is  JNIeas- 
ure  of  Effort,  56,  61 

Price  Fluctuations,  58,  60,  108, 
221,  278,   346 

Current  vs.  Normal  Price,  5!), 
60 

Factors  Accounting  for  Vari- 
able Sellers'  Price  Limit,  61 

32.  Production  and  Constjmptiox, 

5-14 
Means   of   Production,    10,    14, 

132,  1.52,  153,  197 
Specialized  Production,  11,  126 
Waste    Attending    Production, 

13,  58,  219 
Margin  of  Production,  62.  175 

33.  Productive    Groups,     15,    16, 

127,    141 
Functions   Personified,    15,    16, 

141-146 
Active  and  Piissive  Agents,  142, 

143 
Manager  and  Workmen,  142 
Capitalist,  143 
Venturer,  144 
Composite  Agents,  145 
Employer,  146 


34.  Profits,     137-140.      See    also 

(17)     Distribution    of 

Wealth 
Chance  Profits,   138,   144,  215- 

224 
Composite  Nature  of  Business 

Profits,  140 

35.  Rent,  138,  139,  170-185,  348 
Composite     Nature     of     Gross 

Rent,  139 
Rent    Accrues    to    Landowner, 

139,  171,  324 
Ricardo's   Law   of   Rent,    172- 

174 
Margin  of  Cultivation,  175 
Cumulative  Rent,  176 
Intensity  of  Cultivation,   177 
Personal  Factor  in  Rent,  179 
The  Source  of  Rent,  180,  323 
Absorption   of   Rent   by  Taxa- 
tion, 325-329,  348 

36.  Rights,   17 

Exclusive  Rights  Due  to  Law, 

18 
The    Riglit   of   Ownership,    18, 

20,  21,  67-69,  71,  228 
Right  and  Duty,  19 

The  Right  of  Land  Ownership, 

21.  170,   230,    324-330,    360, 
370 

The  Right  Conveyed  by  Money, 
87 

37.  Supply    and  Demand,    34-43, 

56-58 

Total  Supply  Equals  Total  De- 
mand, 34,  269,  270 

Equilibration  of  Supply  and 
Demand,  43,  56,  58,  63 

Relation  of  Supply  and  De- 
mand to  Price,  57,  153 

The  Law  of  Supply  and  De- 
mand, 58,  150 


530 


INDEX 


37.  Supply  and  Demand — Contd, 
Demand    for    Money    Exceeds 

Demand     for     Merchandise, 
201,  270 
Apparent     Excess     of     Supply 
over  Demand,  2G9-270 

38.  Tariff,  284,  351-353 

Tariff  Theory  in  Conflict  with 

Volume  Theory,  351 
Balance  of  Trade  Co-related  to 

Rate  of  Interest,  352 
Advantages  of  a  Tariff,  353 

39.  Taxes,  19 

Taxes    on    Issue    of    Currency, 

103,  238,  303 
Tax  on  Land, 181-184,  325-333, 

359 
Graduated  Taxation,  339 

40.  Theories: 

Cause  of  Business  Stagnation, 

1,  121,  268-284 
Theory  of  Value,  33-65,  153 
Theory  of  Money,  89-92 
Seignorage  Theory  of  the  Value 

of  Money,  113,  114 
Volume  Theory  of  the  Value  of 

Money,     115-125,    239,    320, 

322 
Commodity     Theory     of     the 

Value    of    Money,    115-125, 

239 
Wage  Theories,  163,  164,  166- 

169,  347-350 
Interest     Theories,      190  -  208, 

236-267 
The    Productivity    Theory    of 

Interest,  191-194,  243 
The  Abstinence  Theory  of  In- 
terest, 195,  196 
The      "  Positive      Theory      of 

Capital,"  197-206 


40.  Theories — Continued. 

Tlie  "  Surplus  Value  "  Theory 
of  Interest,  207,  208 

The  Monopoly  Theory  of  In- 
terest, 230-267 

Current  Theories  of  Business 
Stagnation,  277-284,  301- 
363 

Single  Tax,  359-364 

Socialism,  164,  207,  208,  365- 
368 

Communism,  368 

Anarchism,  369-371 

41.  Theory,  1-3 

Departure  from  Averages,  1, 
43,  58,  215-224 

Induction  and  Deduction,  3 

jMultiple  Function  of  Individ- 
uals, 16,  56,  247,  249 

Advantages  of  Graphical 
Methods  of  Study,  46 

42.  Trade  Unions,  354-358 
Labor  Legislation,  355 
Arbitration  in  Labor  Disputes, 

356 
Strikes  and  Boycotts.  357 
What    Trade    Unions    Accom- 
plish, 358 

43.  Unit  of  Value,  28-32,  53,  54. 

See  also   (21)    Gold 

Dollar,  the  Value  Unit  of  the 
United  States,  28 

Labor  Cannot  Serve  as  a  Value 
Unit,  30,  164 

Idealistic  and  Composite 
Units,  31,  32,  111,  119,  321 

Evaluation  of  the  Current 
Unit,  54 

Money  not  a  Value  Denomi- 
nator, 78,79,  115,  122,  123 

Bimetallism,  110 

Depreciated  Value  Unit,  112 


INDEX 


531 


44.  Utility,  6,  7,  9,  24 
Potential  Utility,   10,   14,   132, 

153,  197 
Utility   in   a   Product   is  Lim- 
ited,  14,  139 
Utility  Theory  of  Value.  0-2,  03 
Final  or  Marginal  Utility,  02. 
03,  221 

45.  Value,  23-65.     See  also   (26) 

Land  Values;    (43)    Unit  of 

Value;      (46)      Value     of 

Money 
Exchange     the     Criterion     of 

Value,  23,  25-27 
Value  Distinct  from  Utility,  24 
Dual    Meaning    of    the    Term 

"Value,"  24,  25 
Market     Value     is     Estimated 

Value,  20 
How  Values  are  Measured,  27 
Law  of  Value,  30,  55,   58,  64, 

150 
Theory  of  Value,  38-65,  153 
Exchange  Rate  in  Barter,  47- 

50 
Capitalized  Values,  65 
Value  of  Products  Independent 

of   Interest  Rate,   65 
Value   of    Franchises    Depend- 
ent on  Interest  Rate,  65 
Value    Cannot   be    Created   by 

Law,  70,  125,  334 
The  Value  of  Credit,  75,  76 
The  Value  of  Gold,  108,  109,  320 
The   Value   of   Capital    Goods, 

132,   133,   152,   153,   197,   198 
The  Value  of  Lending,  200 
•'  Surplus  Value,"  207,  208 
Exchange   Cannot   Enhance 

Values,  216 


40.  Value  of  Money,  94,  96,  98, 
100,  107-125,  239,  240 
The  Value  of  Standard  Money, 

94,  98,   114 

The    Value    of    Credit    JMoney, 

95,  90,  101 

Value   of   Money    not   Due    to 

Demand  for  Money,  97,  115, 

123 
Value  of  ]\Iouey  Measured  by 

Conventional  Unit,  107 
Seignorage      Theory      of      the 

Value  of  Money,  113,  114 
Volimie   Theory   of   the   Value 

of  Money,  115-125,  2,39,  320, 

322 
Commodity     Theory      of     the 

Value    of    Money,    115-125, 

239 
Gresham's  Law,   123 
Value    of    Money    not   Altered 

Between  Exchanges,  134 

47.  Wages,  137,  103-169.  (See 
also  (17)  Distribution  of 
Wealth 

The  Sharing  of  Wages,  149, 
165-109 

Wage  Theories,  103,  104,  106- 
169,  347-350 

Three  Forms  of  Wages,  165 

The  Law  of  Wages,  160,  347- 
350 

Employers'  Wages,  107,  168, 
205,  217 

Competition  Tends  to  Dis- 
tribute Wages  Equitably, 
169 

Wages  a  Residual  Share,  267 

Effect  of  Proposed  Currency 
Reform  on  Wages,  350 


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First 
Period. 


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